Everyone associates the holidays with presents, family, snow, and traditions. We are here to add a new tradition to your year-end activities. And we’ve even set it to song.
During the month of December, the IRS grants a cease-fire on collection activity against taxpayers in order to allow them to regroup and enjoy the holidays. If you are an individual or a business that has a liability with the IRS, take this time to regroup, plan and execute your payment plan, estimated tax payments, or catch up.
There are many individuals who can benefit from year-end charitable contributions. The 2023 charitable contribution limit is $17,000 without consequences to your individual gift exemption. A tax advisor will be able to best advise you on whether contributing above the $17,000 annual exclusion makes sense for your financial portfolio based on your past, present, and future earnings and estate.
Depending on your income-generating activities, you may be one of the million individuals who are required to make estimated payments in order to avoid receiving a large tax bill on the day of filing your return or extension. The tax law allows estimated tax payments to be made on the basis of a “lesser of” calculation by either (1) paying 110 percent of the actual tax liability for the preceding tax year or (2) paying 90 percent of the estimated current tax liability for the current tax year.
If you are able to contribute to a retirement account, we recommend hurrying up to contribute to the full amount in 2023. The minimum amounts are $6,500 for an IRA and $2,250 for a 401(k)/403(b). Also, review whether your financial situation allows you to convert your assets from a traditional IRA to a Roth IRA.
Setting up a college savings 529 account can offer a plethora of gifts, estate, and income tax benefits. The amount of growth that a 529 account experiences is income tax deferred, and the funds can qualify for educational expenses beyond just college.
Income is taxed in the year that it is received, and you should consider reviewing your financial status and seeing if you can defer income to another year and save on taxes.
Most people don’t associate tax deductions with costing you extra money, but you can trigger the alternative minimum tax (AMT) when you accelerate some tax deductions. AMT is figured separately from your regular tax bill and has different rules. In the end, you pay the higher tax bill. This is considered a year-end issue because there are certain deductions under regular rules that are not allowed under AMT.
Another name for this is called loss harvesting. It is a strategy that has you review your stock portfolio and sell off those assets where you will realize a loss in order to offset any taxable gains that you have realized throughout the year.
The kiddie tax was created as a way to prevent families from shifting their tax bill on investment income from the parents to the children. For 2023, the kiddie tax applies to a child’s investment income above $2,500 at the same rates as the parents. This is something to watch if you plan or did give your child stock, etc., to handle expenses.
Flexible spending accounts have been a great way to put money into an account that avoids both income and Social Security taxes. You should know the terms of your account in order to confirm the grace period set by your employer for setting aside health care expenses.
Usually, you start to take regular distributions from your IRA by April 1 of the year following the year when you reach 73. There are minimum distribution requirements based on your plan, and an excise tax can be applied to the amount you should have withdrawn based on your age, your life expectancy, and the amount in the account at the beginning of the year.
We now ask that you take these tips and wrap them into your year-end planning as you file your 2023 taxes. Happy Holidays to all!
