The end of the year is quickly approaching, and as people turn their attention to holiday celebrations with friends and family, taxes are naturally the last thing on their minds. However, implementing one or more of these strategies at the end of the year could make a difference come tax time.
- Max out your retirement plan – Review your retirement plans to ensure that you have maxed out your contributions for 2023. For 401(k)s and 403(b)s, the limit is $22,500 plus an additional catch-up of $7,500 allowed for participants over age 50. This means a person could potentially lower their taxable income by $30,000 while increasing their retirement savings.
For Traditional or Roth IRAs, you can make a maximum contribution of $6,500 for 2023; account owners over the age of 50 may can contribute an additional $1,000. Please note that there are earnings limits that could impact the deductibility of Traditional IRA contributions and it is best to speak with your tax professional if you have questions. While contributions to Roth IRAs are not deductible, they are still subject to earning limitations, which change based on your tax filing status.
- Qualified Charitable Distributions (QCD) – Once an IRA owner reaches age 73, they will be forced to take Required Minimum Distributions (RMDs) each year, which is a taxable event. For individuals who do not need the RMDs to meet their cash flow needs, they may want to consider directing the distribution to a qualified charitable organization. Currently, an eligible taxpayer can donate up to $100,000 / year to a charity and exclude that amount from their taxable income. Since many people can no longer itemize under the Tax Cut and Jobs Act of 2017 and do not benefit from a charitable income tax deduction, this strategy could be a great way to reduce your taxable income. It should be noted that QCD distributions can begin at age 70.5 versus age 73 for RMDs.
- Gifting highly appreciated stock – For people who like to make charitable contributions at the end of the year, donating stock instead of cash be more tax efficient. Your deduction will be limited to 30% of your adjusted growth income, but any excess can generally be carried forward and deducted over as many as five subsequent years.
| Donate appreciated stock | Donate $10,000 cash | Sell stock and donate cash | |
| Charitable Deduction | $10,000 | $10,000 | $10,000 |
| Ordinary Income Tax savings
(Assumes 35% rate) |
$3,500 | $3,500 | $3,500 |
| Capital Gains Tax Paid
(Assumes 15% tax rate on $8,000 gain) |
$1,200 saved | N/A | $1,200 paid |
| Net Tax Savings | $4,700 | $3,500 | $2,300 |
- Tax-loss harvesting – For investors who have realized significant gains during the year in their taxable investment portfolios, it could make sense to employ a tax-loss harvesting strategy. Tax-loss harvesting works by allowing taxpayers to use investment losses to offset any realized capital gains. Long-term losses are first applied against long-term gains, and then against short-term gains. Meanwhile, short-term losses are applied first to short-term gains. This sequence takes place because long-term capital gains are taxed at a lower tax rate than short-term capital gains.
Example: If you were to sell several stocks with a combined long-term gain of $20,000, the full $20,000 would be subject to 15% or 20% long-term capital gains tax rate depending on your income. However, if you also sold some stocks for a combined long-term capital loss of $13,000, you would be able to reduce your total realized gains to $7,000. This means your taxable gains for the year would drop from $20,000 to $7,000, which should lead to tax savings.
If you do choose to implement a tax-loss harvesting strategy, you should be aware of the wash-sale rule, which states that you can’t sell a security for a loss and purchase the same security or “substantially identical” security for a period of 30 days before and after the sale date. Violation of this rule will result in the taxpayer not being allowed to claim the loss.
Read more about tax loss harvesting, HERE.
- Bunch Charitable Deductions – One of the most significant changes from the Tax Cut and Jobs Acts of 2017 was to raise the standard deduction amount (2023 – $13,850 for single and $27,700 for married filing jointly). This change means that some people who could previously deduct their gifts to charity are no longer able to do so. One way to address that change is to use a Donor Advised Fund (DAF) in order to distribute charitable A DAF is a charitable investment account that provides simple, flexible, efficient ways to manage charitable giving. The money or assets that go into a donor advised fund becomes an irrevocable transfer to a public charity with the specific intent of funding charitable gifts.
Example: If a married taxpayer makes $16,000 in charitable donations every tax year and has additional itemized deductions of $8,000, they will take that standard deduction of $27,700. However, if they use a DAF and put two years of charitable donations ($32,000) in, they can take an itemized deduction of $40,000 in year one. For year two they will then take the standard deduction of $29,200 (2024 Standard Deduction for Married Filing Jointly) since they will only $8,000 in itemized deductions. By bunching the charitable giving into one year, you can create $69,200 of total deductions between years one and two versus $56,900 if you only used the standard deduction. For a taxpayer this would increase total deductions by $12,300, which could lead to tax savings.
This document is being provided for informational and educational purposes and is not meant to be taken as specific advice. Oakworth Capital Bank does not provide tax or legal advice. All decisions regarding the tax and / or legal implications of these strategies should be discussed with your tax and / or legal advisors before being implemented