By Gerard J. Kassouf, CPA/PFS CFP©
As the end of 2023 approaches, avoid the April tax surprise by reviewing your income, deductions and credits for the current tax year, and begin to plan for 2024. Proper planning for taxes requires a careful review of your individual tax situation. No two taxpayers can plan to the same ending result unless they have the exact same fact pattern. So let’s review some general planning points with the caveat that you should review your personal situation to determine the plan best suited to your income and deductions for 2023 and beyond.
Planning must take anticipated future tax changes into consideration. This includes expiring tax provisions, many of which are expected to expire on December 31, 2025. President Biden pledged to extend the tax cuts for taxpayers earning less than $400,000. However, no pledge is made for people making more than $400,000. With 2024 being an election year, tax law changes will become clearer after the November 2024 elections.
Back to 2023, and tax planning. Let’s begin with income. Depending on your tax bracket, defer income, if possible, to reduce your taxes. If you are fortunate enough to be expecting a bonus, you may be able to arrange with your employer to defer the bonus (and your tax liability for it) until 2024.
Look at your earned income and investment income. However, if you anticipate income levels at or above the 37 percent maximum tax individual tax bracket, consider advancing income into 2024 and 2025 to take advantage of expected lower rates in future years. Income includes wages, Roth conversions, or taxable investment income and capital gain income, among others.
Then consider the timing of deductions, such as charitable contributions, interest or medical expenses to either pay in the current year to reduce 2023 tax or to the next year if that is more appropriate. Remember that bunching deductions in one year and taking a Standard Deduction in the alternative year can provide a better multi-year tax result. Consider gifts of appreciated stock, which generate a tax deduction at the full fair market value of the investment without having to pay capital gains tax on the appreciation of the investment.
Make maximum use of retirement plan benefits. Consider fully deferring or contributing to any 401k, 403b, IRA or SEP IRA accounts available to you. Every dollar you defer or contribute will reduce your taxable income. If you have self-employment income in addition to your W-2 income, open your own account to contribute. If your income level permits, contribute to an IRA in addition to your 401k.
Review your interest income on investment earnings. Determine if your taxable interest is appropriate, or if a tax-free investment such as a municipal bond or mutual fund will generate more after-tax income.
Review your investment gains and losses. Tax loss harvesting is a strategy to sell investments at a loss to offset capital gain income. Not only can you eliminate the gains on sales of investments and capital gain distributions from mutual funds, but you can also offset up to $3,000 of ordinary income and carry forward remaining losses to future years.
If you are a partner or an S corporation shareholder, take steps to increase your basis in the partnership or S corporation to make possible a loss deduction. For example, if a shareholder wants to claim an S corporation loss on your own return, but the loss exceeds the basis for your S corporation stock and debt, you can still claim the loss in full by lending the S corporation more money or by making a capital contribution by the end of the S corporation’s tax year (in the case of a calendar year corporation, by Dec. 31, 2023).
Use your credit card to prepay expenses. For example, charitable contributions and medical expenses are deductible when charged to an individual’s credit card account rather than when the credit card company is paid. If eligible, put new business equipment in service before year-end to deduct the cost of the equipment in 2023.
Increase your withholding before year-end to eliminate or reduce an estimated tax penalty. If you expect to owe state and local income taxes when you file your return next year, ask your employer to increase withholding of state and local taxes (or pay estimated tax payments of state and local taxes) before year-end to pull the deduction of those taxes into 2023. Consider utilizing the benefits of the Alabama Accountability Act in the payment of your Alabama State income tax.
Step up the level of your participation in a business activity to meet the material participation standard needed to avoid the passive loss rules. Also, consider disposing of a passive activity to free up suspended losses.
In addition to income tax planning, remember that Gift and Estate Planning should be reviewed too. While the 2023 exemption amount is $12.92 Million, it is scheduled to be significantly reduced in 2025. Annual gifts tax exclusion amounts are $17,000 ($34,000 for couples) in 2023 and increasing to $18,000 ($36,000 for couples) in 2024. Consider utilizing these benefits for outright gifts, gifts to trusts, custodial accounts or 529 college savings accounts.
While the information provided is not all-inclusive and each taxpayer situation is different, it is meant to be a reminder of the importance of planning ahead. You have a few weeks left in 2023 to review your options. Use the remainder of the year wisely, and start early for 2024.
Gerard J. Kassouf, CPA/PFS CFP© is a Director in the CPA and Advisory firm of Kassouf & Co., Inc. He can be reached at gkassouf@kassouf.com.
