Hitting the Essentials Before Year-End


by Samantha Pahlow, CTFA, AWMA
Senior Vice President
Portfolio and Wealth Management

As the year draws to a close, it’s good practice to take stock of your financial situation, finish any important financial transactions by the end of the year and begin to look ahead to the next one. It can be helpful to refresh yourself on some of the key numbers related to year-end tax planning and take a peek at how they will change next year so that you can tackle any final items for 2023 and begin to plan for 2024. 

Gifting 

This year, many of our clients chose to take advantage of the annual gift exclusion to shift assets, without gift tax implications, to the next generation. For 2023, the limit is $17,000 per person, and you are allowed to give money to as many people as you like. Next year, this limit will increase to $18,000.  

Keep in mind that you can also make unlimited gifts to pay for someone's medical expenses or educational tuition, without incurring gift tax consequences, if you make the payments directly to the medical service provider or educational institution.  

Deductions 

The standard deduction for 2023 is $13,850 for an individual and $27,700 for a married couple filing jointly. Next year, those figures will increase to $14,600 and $29,200, respectively.  

Individuals can squeeze out additional savings on their taxes by paying attention to whether they are taking the standard deduction or itemizing, and strategically timing deductions using a strategy called “bunching”. For a quick review of how bunching works using charitable donations click here

Gains Management 

In addition to optimizing deductions, individuals may be able to reduce their tax bill by taking advantage of tax loss harvesting opportunities in non-retirement accounts. This strategy involves selling investments that have incurred losses, allowing a current deduction of those losses against realized taxable gains from other assets. To remain invested and maintain their desired asset allocation, the sold asset can be temporarily replaced with a similar but different investment. This can reduce overall tax liability while continuing to participate in the market. There are nuanced rules related to tax-loss harvesting, so it is important to work with your portfolio manager or tax advisor for guidance.  

Alternatively, if you expect to have very low income in the current year, it may be beneficial to sell assets at a gain to take advantage of the 0% capital gains bracket. This strategy can increase your cost basis with no federal tax. 

Retirement Contributions 

  • Employer Plans: As always, remember that retirement accounts have annual maximum contribution limits, so to the best degree possible, it is often encouraged to maximize your contributions. The contribution limit for employees who participate in 401(k), 403(b) and most 457 plans is $22,500 for 2023. Next year, the limit will increase to $23,000. The catch-up contribution for those 50 and over will remain at $7,500 for both 2023 and 2024. 

  • IRAs: Annual IRA contributions can be made up to $6,500 in 2023 and will increase to $7,000 in 2024. The IRA catch-up contribution for those age 50+ also remains at $1,000 for both 2023 and 2024.  Keep in mind there are earned income requirements and limits related to contributions to traditional and Roth IRAs. Additional information can be found here.

  • SIMPLE IRA: The contribution limit for SIMPLE IRAs is $15,500 for 2023 and increases to $16,000 next year. As with the prior retirement contributions, the SIMPLE catch-up contribution will remain at $3,500 for both 2023 and 2024. 

Required Minimum Distributions 

The rules regarding when to begin taking annual required minimum distributions from retirement accounts have been in flux for the past several years. The most recent change came about via the SECURE Act 2.0. We recommend reviewing the rules with your portfolio manager or tax preparer to ensure you know when you are required to begin taking distributions. Our colleague, Charissa Anderson, CFP®, CDFA®, recently authored an article on the changes to RMD beginning ages, click here.

For anyone who turned 72 in 2022 or earlier, you will need to continue taking RMDs as scheduled. Below you will see the new SECURE Act 2.0 phased-in timeline for RMD beginning ages. 

For inherited IRAs, the distribution rules are quite complex and depend on numerous factors. It’s important to work closely with your tax advisor to ensure you understand your options and requirements. 

If any of these items remain on your to-do list before year-end, consult with both your tax advisor and portfolio manager to ensure you are taking the appropriate actions before December 31.   

Ferguson Wellman, Octavia Group and West Bearing do not provide tax, legal, insurance or medical advice. This material has been prepared for general educational and informational purposes only and not as a substitute for qualified counsel. We believe the information provided is from reliable sources but should not be assumed accurate or complete. You should consult qualified professionals to understand how this information may, or may not, apply specifically to you. 

Disclosures