2023 Tax and Planning Reminders

Taxes are a central component of financial planning. Almost every financial planning issue - whether it is retirement, investments, cash flow, insurance, or estate planning - has tax considerations. As your financial advisor, we feel we can add value by helping our clients understand and minimize their overall tax burden. Although we do not offer tax advice, we want to make sure we provide you with information to help you understand and manage your tax burden. The following list is designed as a reminder prior to the end of the year.

Review Changes to Marital Status

If there has been such a change, consider how your tax liability might be affected based on your new marital status as of Dec. 31.

Have You Met Your Annual Health Insurance Deductible

If you have already met your health insurance deductible for the current year, consider any additional medical expenses before year-end. A new year means your deductible will reset.

Make Full Use of Retirement Accounts

For the average investor, one of the best ways to reduce current and future tax liability is to contribute the maximum amount to a retirement account every year. There are myriad options to save for retirement, including IRAs, 401(k)s, and 403(b)s. Investors can also choose when they’d like to be taxed on these retirement options. Traditional accounts are funded with pretax dollars, then taxed on retirement withdrawals. The Roth version of any of these accounts, on the other hand, allows the investor to pay taxes now and then withdraw their funds in retirement tax-free. Below are the guidelines for contributions in 2023.

Elective Deferral Limit for 401k and 403b Plans: $22,500

Catch-Up Contribution Limit for 401(k) and 403(b) Plans: $7,500

Solo 401(k) Plan: $66,000

Solo 401(k) Catch-Up: $7,500

SEP IRA: 25% of Compensation up to a maximum of $66,000

Traditional IRA: $6,500

Traditional IRA Catch-Up: $1,000

Roth IRA: $6,500

Roth IRA Catch-Up: $1,000

Contribute to a Health Savings Accounts (HSA)

A health savings account (HSA) is triple tax-free. An investor receives a tax deduction when contributing to the account, the funds grow tax deferred, and if the money is used to pay for medical expenses there is no tax paid on the growth of the account.

If you can contribute to your HSA account make sure to do so before the end of the year. HSA contributions cannot exceed $3,850 for individual coverage and $7,750 for a family with a high-deductible health care plan (HDHP) in 2023.

Check the Status of Your Flexible Spending Account (FSA)

If you have a flexible spending account through your employer, make sure you understand the rules. Some companies allow up to $570 of unused FSA funds to be rolled over to the next year. Some offer a grace period until March 15 to spend unused FSA funds. Many companies offer 90 days to submit receipts from the prior year. And if the client has a dependent care FSA, check the deadlines for unused funds.

Consider Charitable Contributions

You should discuss how charitable contributions can benefit you. You may look at bulking a few years of contributions into a single year to maximize the deduction when it could be most beneficial to you.

Whatever amount and when you decide, using appreciated assets, instead of cash, to fund your contribution will maximize its effectiveness by eliminating capital gains on the contributed security. This is in addition to the deduction you receive for the contribution.

Creatively Using a Donor-Advised Fund (DAF)

A donor-advised fund is an investment account whose purpose is to support charitable organizations. A donor is eligible for an immediate tax deduction when contributing cash, securities, or other assets. These funds can then be invested for tax-free growth until the donor decides to distribute them to charity.

A DAF is especially useful when an investor owns a security with no cost basis, a highly appreciated stock, or a long-held concentrated position. In all these scenarios, a capital-gains tax liability can be avoided by moving the position to a DAF.

Make a Qualified Charitable Distribution

If you are over age 70 1/2, consider making a QCD to a charity directly from your IRA account. Those who meet the age requirement can transfer up to $100,000 per year directly from an IRA to an eligible charity without paying income tax on the transaction.

Tax Loss Harvesting in Taxable Accounts

Tax-loss harvesting refers to selling investments at a loss to offset the amount of capital-gains tax owed from selling other investments with a gain. This strategy helps preserve the value of the portfolio while reducing taxes. It’s prudent to review a your portfolio annually for tax-loss harvesting opportunities.

Gift Tax Exemption

The annual gift exclusion, is If you are inclined to gift to your family members or contribute to your grandchildren’s education savings accounts, you can contribute up to $17,000 each or $34,000 as a couple to each individual without the recipient having to claim the gift as income.

Know the Value of Your Estate for Tax Planning

In 2023, an individual estate with more than $12.92 million, or a married couple with an estate of more than $25.84 million, would be subject to federal estate tax. However, after 2025 the exemption is set to go back to a far more restrictive $5.49 million per individual, adjusted for inflation.

Making gifts to family members, properly structured trusts, or charities may help minimize the estate tax owed upon an individual’s death, thereby increasing the amount of money left to loved ones.

Business Owners and Freelancers

One of the best tax benefits in the U.S. is owning your own business. Even a W-2 employee of a larger company can access many tax-saving opportunities by having a small side business. One benefit of being a business owner is having additional ways to save for retirement, like SEP IRA, solo 401(k), or a Defined Benefit Plan to save large amounts of money in qualified retirement accounts. A business owner also can receive tax deductions for a home office, car, travel expenses, and supplies and services related to their business. It’s a wonderful way to keep more money in your pocket.

The rise of the 'gig economy' has been a major theme in work life during the past several years, with 60 million Americans (about 39% of the workforce!) taking on one or more freelance jobs in 2022. And while freelance work can provide more time and location flexibility than a traditional '9-to-5' office job, it also comes with additional responsibilities (and opportunities), particularly when it comes to taxes.

First, freelancers typically are required to make quarterly estimated tax payments and can be subject to penalties if they forget to do so. In order to file their taxes correctly, freelancers can ensure they have the documentation they need by keeping careful, detailed records of their income and expenses (potentially saving all invoices and receipts so that they can be double-checked). In addition, freelancers could consider setting up separate bank accounts and credit cards for their business so that they do not unintentionally confuse personal and business expenses, which could lead them to incorrectly take certain deductions (e.g., for travel or meals). Finally, while company employees often benefit from a company-sponsored retirement plan, freelancers have to set one up on their own, though these plans can come with higher contribution limits compared to those available to company employees!

Altogether, financial advisors can play a valuable role not only in helping clients who are freelancers meet the range of tax-related responsibilities they face, from record-keeping requirements to estimated tax payments, but also to take advantage of the retirement savings and deduction opportunities potentially available.