Where has the time gone? Another year is almost over. Here are some last-minute tax-planning considerations before we close out the year and begin the new one:

Capital Loss (or Gain) Harvesting

Some things that should certainly be reviewed before year-end are any investments held in a taxable account (such as a brokerage account). Depending on your tax situation, you may want to consider harvesting some losses to reduce your investment income. Or if your income is low enough, you may be deliberately generating gains at a low- or no-tax rate.

How Capital Losses Work

The more common practice of the two is realizing capital losses before year-end. When you sell an investment, such as a stock or mutual fund, at a loss, you can offset that loss against any capital gains you have during the same year. You may want to consider doing this if you are trying to bring your income down into a lower tax bracket or qualify for certain credits and deductions that you won’t have access to if your income is too high.

It’s important to keep in mind how capital gains are taxed and how capital losses offset them. If you hold an investment for more than one year and sell at a gain, you incur a long-term capital gain. This is taxed at a lower rate than typical income tax brackets. Alternatively, if you sell an investment for a gain and it was held for less than a year, you incur a short-term capital gain. Short-term gains are taxed at regular income tax rates, which are higher than capital gains tax rates.

A capital loss will offset its corresponding gain (short against short and long against long). If you have extra losses left over, the other type of loss will spill over to offset the other type of gain. When reviewing whether you want to realize some losses to offset gains, you also need to review what type of loss you’re realizing to make sure you’re offsetting the right kind (if it won’t spill over).

Another thing to keep in mind is that if you offset all your gains in a year, you can deduct up to $3,000 of additional losses against your regular income. Any losses still available over $3,000 are carried forward and can be used to offset gains or income in future years.

Example: In 2023, Mike realized $2,000 of short-term capital gains and $3,000 of long-term capital gains. He wants to reduce some of his income, so he sells a stock for a long-term capital loss of $10,000. The long-term loss would first offset his $3,000 long-term gain, leaving $7,000 remaining. That $7,000 would spill over to the short-term gain, completely offsetting it. Since he still has $5,000 of losses remaining, Mike can use $3,000 as a deduction to reduce his current year’s income. The remaining $2,000 is carried forward to 2024 to reduce any future gains in that year.

The last crucial point about capital losses is to avoid the “wash sale” rule. A wash sale is defined as “a sale of securities within 30 days before or after the purchase of substantially identical securities.” This rule prevents people from selling an investment at a loss for tax purposes and then buying it back soon after. A key distinction is that the definition is really more of a 60-day window because it looks 30 days before and 30 days after a sale for a loss.

Technically, this rule will also cover sales across account types. In other words, you can’t sell an investment for a loss from a taxable investment account and repurchase it for an Individual Retirement Account (IRA) within the specified time frame.

If you repurchase the position, or something materially similar, within 30 days before or after, the loss is added back to the repurchased investment to calculate your tax “basis.” The loss is not gone for good; it was just not taken at the desired time. It’s imperative to keep this rule in mind if you are tax-loss harvesting at year-end.

Example: Mary wants to realize some losses for year-end but wants to plan ahead, so she buys 100 shares of SPY (an S&P 500 fund) at $100 a share ($10,000 total cost) on December 1. On December 5, she sells 100 shares of IVV (a different S&P 500 fund) for a $5,000 loss. Since she acquired a materially similar investment 30 days before her loss, the $5,000 loss is disallowed. The loss does not go away—it is added to the basis of the shares of SPY to bring its total basis to $15,000. If Mary wants to realize the loss before year-end, she would have to sell the newly acquired shares of SPY and not purchase a similar investment for the next 30 days.

When to Consider Capital Gain Harvesting

A less-talked-about—but arguably just as impactful—planning strategy is capital gain harvesting. Why would someone willingly incur gains? Well, under the current tax law, there is a possibility that these gains could be realized without being taxed. Like other types of taxable income, capital gains are subject to tax brackets. The tax rates for capital gains are currently 0%, 15%, or 20%, depending on the amount of your taxable income.

If you file jointly and your taxable income is less than $89,250 ($44,625 if you are single), you can realize long-term capital gains at no tax. If you have gains, it may make sense to incur this income up to the threshold to avoid paying taxes on some of your capital gains. Of course, like most things related to tax planning, this should be weighed against other tax-planning opportunities, such as Roth conversions, which will be discussed later.

Retirement Contributions

Another common way to manage your taxes during the year, up to certain limits, is by utilizing retirement plan contributions. The type of account you are contributing to will determine when the contribution needs to be made to count for 2023. If a contribution is not made on time for a specific year, you can’t go back and make up missed amounts in future years. Here are the deadlines for some common retirement accounts:

401(k), 403(b), and TSP plans

One of the most common retirement plans for working Americans is the 401(k) (403(b) if working for a nonprofit/TSP if working for the federal government). Any contributions to these accounts need to be made during the calendar year to count for 2023. Contributions made after the current year will count for the following year.

In 2023, you can contribute up to $22,500 ($30,000 if 50 or older). There likely won’t be enough time to alter your contributions to max out your account in 2023 if you haven’t already. However, 2024 is a fresh start, and you can adjust your contributions to max out your savings next year. In 2024, the contribution limit will increase by $500, so make your adjustments accordingly.

Last, many plans provide the choice of contributing to a regular 401(k) or a Roth 401(k). The former allows for a tax deduction today, but you will be taxed when you take money from the account later. The Roth option does not result in a tax deduction, but qualified future withdrawals will come out tax free. Determining which type of account is better to contribute to will depend on your unique tax situation and should be reviewed by a qualified tax planner or financial advisor.

IRAs and Roth IRAs

Other common retirement accounts are IRAs and Roth IRAs. Contributions to these accounts, unlike 401(k)s, do not need to be made by year-end to count for the current year. You have until the tax filing deadline of April 15 to make contributions for 2023. You can currently contribute $6,500 a year ($7,500 if you are 50 or older). Whether you can contribute, and what tax benefits you can receive, will depend on your income for the year.

IRA contribution deduction rules can be a little complex because they depend on a variety of factors. The most straightforward is that if neither you nor your spouse is covered by a retirement plan at work, you can take a full deduction on your IRA contribution. If you don’t have a retirement plan through work but your spouse does, then your IRA contribution will be fully deductible if your adjusted gross income (AGI) is less than $218,000, no deduction if it is over $228,000, and a partial deduction if it is between those amounts. Last, if you are covered by a plan at work, you can take a full deduction if your income is below $116,000 if married filing jointly ($73,000 if single), no deduction if over $136,000 ($83,000 if single), and a partial deduction if in between. No deduction is allowed if you are married filing separately and your income is greater than $10,000. No deduction is allowed if you are married filing separately and your income is greater than $10,000.

Even though you may be able to take a deduction on an IRA contribution, that doesn’t mean you should. If you or your spouse is covered by a plan and you can take a deduction, that means your income is likely low enough to allow for a Roth contribution instead. Depending on your current and projected future tax bracket, it may be more advantageous to contribute to a Roth rather than a deductible IRA.

As we’ve discussed before, for a Roth account, you receive no deduction on any contributions, but any growth in the account and subsequent future withdrawals are tax free. This can be a powerful retirement savings tool, but not everyone can contribute to a Roth IRA. In order to be allowed to make a full contribution to a Roth, your AGI needs to be below $218,000 if married ($138,000 if single), but no contribution can be made if over $228,000 ($153,000 if single), and a partial contribution can be made if in between.

Since you can make an IRA contribution after year-end, you have little time to determine whether you’re eligible. However, what cannot wait is making any last-minute tax moves, such as tax-loss harvesting, to reduce your income to potentially qualify for a contribution this year. Once the year is out, there isn’t much you can do to reduce your income further if you were close to the eligibility threshold for a Roth.

Health Savings Accounts (HSAs)

Like IRAs, HSAs can also be contributed to after year-end. There are special rules that determine whether you’re eligible to contribute, such as being enrolled in a high-deductible health insurance plan and not being enrolled in Medicare. However, assuming you are able to contribute, you can add up to $3,850 annually if you are on a self-only plan or up to $7,750 if you are on a family plan in 2023. If you’re over 55 (not 50, like other retirement accounts), you can contribute an additional $1,000 as a catch-up contribution.

As financial planners, we adore HSAs because they are one of the few accounts that offer a triple tax benefit. You get a tax deduction for contributions going in, the money in the account grows tax deferred, and it can be taken out tax free for qualified expenses.

What can be even more advantageous is that if you didn’t contribute to an HSA during the year and are close to the Roth IRA income limits, adding money to your HSA may drop your income low enough to become eligible for a Roth after year-end. This is one of the few things you can do before the tax filing deadline to reduce your income and possibly qualify for making a Roth contribution.

Roth Conversions

A Roth conversion is when you move money from your traditional IRA to your Roth. You pay tax on it in the year the money moves over, but once inside the Roth, future growth accrues tax free. The conversion needs to occur before year-end in order for it to count for the current calendar year.

Conversions will increase your income in the year in which they’re completed, and because of this, they can be a powerful tax-planning tool. They allow you to shift money from a tax-deferred to a tax-free account. Depending on your tax situation, you can fill up lower tax brackets if your future tax bracket is expected to be higher. However, you need to hurry if you want to convert any money before the year is out.

Required Minimum Distributions (RMDs)

While saving for retirement is great, you can’t necessarily defer that income forever. All that money you’ve saved in pretax retirement accounts, such as 401(k)s and IRAs, needs to start coming out in the year you turn 73. From then on, the minimum percentage you will need to take each year will increase based on your age.

It’s important to note that this is the minimum you need to take out annually. You, of course, can take more to satisfy this requirement. With only a couple of weeks left in the year, it’s imperative that if you haven’t taken your RMD yet, you take it before year-end. Otherwise, you may owe a penalty of up to 25% of the amount that should have been taken but wasn’t![1]

Some people over 70 1/2 are able to direct a portion of their RMD to charity by writing checks on their IRAs to charity (known as qualified charitable distributions, or QCDs). For reporting purposes, checks need to clear by December 31 to count for 2023. If you write a check and it does not clear before the end of the year, it will not count! Keep this in mind for any last-minute checks written, and if you’re still short of satisfying your RMD, take a distribution to meet the difference. When the check clears next year, it will count toward your 2024 requirement.

Charitable Contributions

The holiday season is known as a time of giving. Luckily, sometimes generosity can help your tax bill, too. However, since the increase of the standard deduction in 2018, far fewer people have been able to deduct their charitable contributions.

One way to continue taking advantage of the charitable contribution tax deduction is by using a donor-advised fund (DAF). This allows you to transfer appreciated securities in 2023 to a separate charitable account but influences the timing of when they are distributed to charities (perhaps spreading that over several years). Since you make the transfer to the DAF in 2023, you are entitled to a charitable tax deduction in 2023 of the fair market value of the securities.

As we briefly mentioned above, another tax-advantaged way to give to charity for those who are older (at least 70 1/2) is by utilizing a QCD. This is when someone gives money from their IRA directly to a qualified charity. The benefit of doing this is that any money donated this way comes out tax free! As an added benefit, this also counts toward your RMD amount for the year. You can do this for up to $100,000 annually. However, as mentioned before, time is running out to get these distributions done. So, if this applies to you, make sure to process these as soon as possible to ensure that they count for 2023.

Another thing to keep in mind is that the institution that holds your IRA won’t keep track of which distributions are classified as QCDs and which are normal distributions. Your tax form will lump all the distributions together. It’s up to you to tell your accountant how much was sent as a QCD. Otherwise, you’ll end up paying tax on money that could have been tax free!

Estimated Tax Payments

Now that we’ve reviewed some tax-planning considerations that need to be thought through before year-end, it’s time to put it all together. After you’ve made any final adjustments, it’s also time to determine whether you need to pay any additional estimated taxes for the year. This, of course, means you’ll need to include any extra income from Roth conversions or RMDs in addition to income reductions from any final retirement plan contributions or tax-loss harvesting.

Federal estimated tax payments can be made online on the IRS’s website. Depending on the state you live in, it may make sense to make an estimated tax payment to your state as well. These payments need to be in by January 15, so you have a little time after the end of the year to button up your tax situation before making the final payment.

Summary

Although the year has all but wound down, there still may be some final tax-planning moves to make before year-end. Although many tax-planning considerations need to be implemented before the end of the calendar year, some things, such as certain retirement account contributions, can wait until the tax filing deadline of the following year.

If you missed some planning opportunities this year, that’s OK. The new year is a great time for reflection on improvements to make during the next 12 months. Of course, if you need assistance reviewing your tax situation and overall financial planning, please don’t hesitate to reach out to our team.

[1]Note that Secure Act 2.0 decreased the RMD penalty from 50% to 25%.

Disclaimer/Author(s) Bio: This is not to be considered investment, tax, or financial advice. Please review your personal situation with your tax and/or financial advisor. Milestone Financial Planning, LLC, (Milestone), a fee-only financial planning firm and registered investment advisor in Bedford, NH. Milestone works with clients on a long-term, ongoing basis. Our fees are based on the assets that we manage and may include an annual financial planning subscription fee. Clients receive financial planning, tax planning, retirement planning, and investment management services, and have unlimited access to our advisors. We receive no commissions or referral fees. We put our client’s interests first.  If you need assistance with your investments or financial planning, please reach out to one of our fee-only advisors.  Advisory services are only offered to clients or prospective clients where Milestone and its representatives are properly licensed or exempt from licensure.

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