2023 Tax Planning Strategies

By Solon Vlasto, CFP®

Wealth Manager, Principal

May 25, 2023

Yes, you’ve just filed your return for the 2022 tax year, but it is not too early to take actions that can positively affect your income tax status when you file your tax return next spring. As a reminder, please share a copy of your tax return with your advisory team. Consider the following strategies that could help reduce your marginal tax bracket for 2023, regardless of your income level:

Start Planning Now to Make an Impact on Your 2023 Taxes

For those who are still working:

  • Postpone Your Bonus: Do you expect to receive a bonus this year? Can you push payment into 2024, instead of receiving it in 2023? If so, this would be a relatively simple way to defer and reduce your taxable income in 2023.
  • 401(k) Plan: Are you contributing enough to your employer’s 401(k) plan? In 2023, you can contribute up to $22,500 to your plan ($30,000 if you are 50 or older).[1] The stock and bond market corrections in 2022 and early 2023 may have provided an opportunity to accelerate your contributions and buy in at lower price levels. Your employer may also match your higher contributions, potentially making contributing to your 401(k) even more attractive. You can still make additional 401(k) plan contributions this year even if you switched jobs (if your new plan allows), up to the maximum contribution level between the two plans.
  • Business Retirement Plans: Do you own a profitable business? If so, you can reduce your taxable income through different business retirement plans, such as a cash balance plan. Depending on your age and business income, the maximum allowable tax-deductible contribution to a cash balance plan could be as high as $330,000 in 2023.[2] Alternatively, solo entrepreneurs who want a simple and inexpensive business retirement plan option can use Individual 401(k) plans to defer up to $66,000 of their business income in 2023.[3]
  • Elective Pass-Through Entity Tax: Another consideration for the business owner is elective pass-through entity tax. Some states allow you to deduct state taxes through your business entity.[4] This can be more beneficial than itemizing state taxes on your personal income tax return. Talk to your CPA to learn more about how to do this and your state’s eligibility and requirements.

This is applicable to everyone:

  • Event Management: Did you have a big life change this year, such as a marriage, divorce, or death of a spouse? Such events can significantly alter your income tax status.  When you file your taxes, make sure your tax withholding strategy or estimated tax payments are appropriate for your new tax status.
  • Capital Gains Distributions: Any mutual funds that you own can pay out capital gains distributions during the year (even if the net asset value of those funds is down for 2023). You can usually find estimates and timing of any potential capital gains distributions on the website of the mutual fund company. Talk to your Modera advisor and CPA about an appropriate investment strategy if you own any funds in a taxable account that are expected to pay a meaningful capital gains distribution.
  • Charitable Contributions: You can make your charitable contributions on or before December 31st and get the tax benefit for the full 2023 tax year. Also, if you have an IRA and are taking required minimum distributions (RMDs), you can elect to have your RMD taken out as a Qualified Charitable Distribution (QCD) to be paid directly to a charity.
  • Donor-Advised Funds (DAF): DAFs offer you a chance to earn an immediate tax write off by committing to a future series of planned charitable contributions. A DAF may be an ideal solution for people who have experienced an unusually large and taxable liquidity event or windfall (income from an inheritance, sale of a business, stock options, or legal settlement) during 2023.
  • Estate Loss Carryover: You can potentially benefit from unused losses from an estate or trust that you inherit. Such carryover losses can then be used to reduce income during the rest of your lifetime or until those losses are exhausted.[5]
  • Roth IRA Conversion: Could 2023 be a lower-than-expected income year for you? Do not ignore low-income years when it comes to income tax strategy. This year may present an ideal opportunity to convert your traditional individual retirement accounts (IRAs) into Roth IRAs if stock and bond markets are down and if you are in a lower income tax bracket. Both scenarios could reduce the income tax paid on your traditional IRA withdrawals throughout retirement. This may be especially helpful in the years before you are required to start withdrawing from your traditional IRA (age 72 currently, age 73 if born between 1951 and 1959, or age 75 for those born in 1960 or later).[6] Keep in mind that Roth IRAs have no requirement to make distributions during your lifetime (or your spouses), and your heirs have up to ten years to distribute the balance. Also, there is no income tax paid on Roth IRA distributions, unlike those made from a traditional IRA.
  • Federal Disaster Areas: Damaging weather events or other natural disasters can present significant, life-changing challenges. Victims of federally declared events may be able to deduct a large casualty loss. (Reminder: If you are a taxpayer in an Alabama, Georgia, or California 2022 federal disaster area, you have until October 15, 2023, to file your tax return for the 2022 tax year.)[7]

Need Year-End Tax Help?

There may be one or more tax strategies that are potentially relevant to you. Act now, while there is still plenty of time to plan for 2023. We invite you to talk to us about your options and tax action plan for the remainder of this year.

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