By Karen Hube
Dec. 11, 2023
There is still time for retirees and others to pare their 2023 federal tax bill.
Illustration by Jan Buchczik
It’s tough to focus on taxes during a busy holiday season. But come tax-filing time next year, you’ll be glad you did, says Derek Pszenny, senior wealth manager at Carolina Wealth Management. “A lot of small moves can add up to make a big difference.”
Those 70½ and older should pay particular attention to charitable gifts. Direct contributions to charities from individual retirement accounts can lower your taxable income by up to $100,000 a year.
Here are a handful of tax moves to consider:
Defer income to 2024
Thanks to a 5.4% upward inflation adjustment to the 2024 income-tax bracket thresholds, you may keep more money in your pocket by deferring year-end income and bonuses to next year.
“If you’re making the same income this year and next, you’re potentially going to be in a lower income-tax bracket in 2024,” says Robert Dietz, national director of tax research for Bernstein Private Wealth Management.
For single filers, the 37% tax rate will kick in on income of $609,350 or more in 2024, up from $578,125 for 2023 income. The 35% tax rate will apply when income hits $243,725 next year, compared with $231,251 this year.
For couples filing jointly, the 37% threshold will rise to $731,200 next year from $693,751, and the 35% bracket will begin with income of $487,450, up from $462,501.
Accelerate deductions
The Internal Revenue Service also made a significant inflation adjustment to the standard deduction for 2024, raising it to $14,600 for singles from $13,850, and $29,200 for couples filing jointly from $27,700. This means you could get a greater benefit from maximizing your itemized deductions this year.
Taxpayers can choose whether to claim the standard deduction or itemize deductions. Few taxpayers have itemized since the Tax Cuts and Jobs Act went into effect in 2018, because it raised the standard deduction and capped the deductibility of state and local taxes at $10,000, making it less likely that itemized deductions would exceed the standard deduction.
To maximize deductions, Dietz recommends bunching several years’ charitable gifts, which are potentially the biggest discretionary deductible expense.
“If you were planning to bunch deductions next year, maybe it makes sense to accelerate the bunching to this year,” he says.
Consider giving appreciated securities instead of cash. If you have $11,000 in stocks with a $1,000 cost basis, that stock may be worth about $8,000 to you after taxes. “If you contribute the stock to charity, you will get the $11,0000 deduction, even thought it is only worth $8,000 to you,” says Stephen Baxley, head of tax and financial planning at Bessemer Trust.
Lock in losses
If you have any portfolio duds, consider selling and using losses to offset gains.
Long-term losses may be used to offset long-term gains—and short-term losses cancel short-term gains. In any year, losses can offset up to $3,000 in taxable income. Any excess losses can be rolled forward to cancel gains realized in future years.
Check your mutual funds’ planned distributions
Every year around this time, mutual funds announce distributions of gains that are realized in the process of trading investments within the portfolios. Whether you bought a fund the day before or 10 years prior, all investors receive the same distribution per share, subject to long-term capital-gains taxes when held in a taxable account.
It isn’t expected to be a big year for mutual fund year-end capital gains distributions, but there are always exceptions, Pszenny says.
A typical distribution is 5% to 10% of a fund’s net asset value, according to Morningstar. If it is more than that, it could make sense to sell out before the distribution is made.
Pszenny points to Delaware Ivy Value fund as a cautionary tale. The fund lost nearly 5% of its value in 2022 and is about flat this year, but in November, it announced it will be distributing 28.8% of net asset value, or $5.87 per share.
If you put $100,000 into the fund at the beginning of 2022, you would be down about 5% on that original investment and still receive a taxable $21,023 distribution, Pszenny says.
“My advice would be to sell ahead of the distribution, realize the loss, and use it to offset gains on other investments,” he says.
Begin a three-year Roth rollover
If you could benefit long term by rolling your tax-deferred IRA assets into a tax-free Roth IRA but hesitate because income taxes are due on the converted amount, consider several smaller transfers.
A multiyear strategy could prevent you from bumping into a higher tax bracket, but aim to have your rollover completed by 2026, Dietz says. That’s when current income-tax rates are scheduled to sunset and revert to their pre-2018 levels. Without action by Congress, the top rate will jump to 39.6% from the current 37%.
Use or lose opportunities
The following tax-beneficial moves are perennial with a year-end deadline, and greatly amplified if they are used every year:
• For those over age 70½ with charitable intentions, consider a direct contribution of up to $100,000 from your IRA to a public charity. “You don’t get a deduction, but the amount you give is excluded from your income,” Baxley says.
If you are 73 or older and required to take a 2023 minimum distribution, your gift can count toward the requirement.
• Take advantage of tax-free annual gifting. This year, each person can gift up to $17,000 to another person with no gift tax consequence. It adds up: A couple with three recipients can give a combined $102,000.
• Maximize contributions to employer-sponsored retirement plans. The 2023 maximum for 401(k), 403(b), and 457 plans is $22,500, or $30,000 for folks 50 and older.
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