2023 Year-End Tax Planning for Individuals

by Crystal Knepler, CPA | November 10, 2023

As the 2023 tax season winds down, it’s time to take a closer look at year-end tax planning strategies to favorably position yourself for tax implications next year.

While the ebb and flow of tax legislation has become commonplace, we’ve seen significant tax law changes enacted over the last two years, several provisions that have already expired, and other key policies are expected to sunset in 2025. This rapidly evolving tax environment underscores the importance of effective tax planning to avoid any unintended tax consequences in the future.

Following, we’ll discuss these shifts and present opportunities to strategically minimize taxes as you prepare to reset for the new tax year.


Secure 2.0 Changes

On the federal level, Secure Act 2.0, enacted in December 2022, introduced over 90 provisions designed to encourage individuals to save more for retirement and incentivize small businesses to offer employer plans. While some provisions have already taken effect, others are slated to kick in for tax years 2024 and beyond. And not all are tax friendly.

Below are highlights of the landmark legislation to consider for your situation.


Relief to Heirs of Inherited IRAs

The IRS is providing relief to non-spousal beneficiaries of inherited IRAs who are subject to the 10-year rule, allowing them to skip required minimum distributions (RMDs) in 2023. However, the IRS did not extend the overall distribution timeline, which means individuals will need to estimate annual income in order to calculate how much to withdraw each year. In some cases, it may even be wise to split the primary beneficiaries to extend the life of the inheritance and reduce the overall tax burden.


Catch-Up Contribution Changes Postponed

The IRS announced that it will extend the new provision stemming from SECURE Act 2.0 that requires employees with annual income exceeding $145,000 to divert their 401(k) catch-up contributions into a Roth 401(k) account.

These changes will be postponed for two years to 2026, which will allow high income earners to maximize their pre-tax retirement savings before the change goes into effect. After 2026, however, qualifying catch-up contributions will be funneled to an after-tax Roth 401(k), which may bump some taxpayers into a higher tax bracket, so plan accordingly.


529 Plan Roth Rollovers

Starting in 2024, 529 plan holders can rollover funds into a Roth IRA without incurring taxes. If the 529 account has been open for at least 15 years, plan holders can transfer up to the maximum annual Roth IRA contribution limit of $7,000 in 2024 ($8,000 if you’re age 50 or older), for a lifetime rollover cap of $35,000.

This recent legislative change helps repurpose any unused 529 funds into retirement accounts if a beneficiary does not need the funds for education or if a high earner phases out of annual income limits exceeding $158,000 for single filers and $218,000 married filing jointly.


No RMDs for Roth 401(k)s

Owners of designated Roth 401(k) accounts no longer need to take RMDs beginning in 2024 (similar to current law for Roth IRAs). However, if you turn 73 in 2023, you will need to take your first—and last—RMD on your Roth 401(k) before the new law takes effect.


Qualified Charitable Distribution

Eligible retirees are now allowed to fund a charitable gift annuity with a qualified charitable distribution (QCD) from their IRA. This new law triggers new opportunities for retirees who wish to defer their tax obligations, satisfy required minimum distributions, and support a charitable mission.

Donors who are at least 70 ½ and older can make a one-time election of up to $50,000 in a single year to fund a charitable gift annuity, which counts toward the $100,000 annual limit for direct IRA distributions to 501(c)(3) charities. Smaller payments can be allocated throughout the year to reach the maximum contribution limits.


The $600 Rule for Income Reporting

For self-employed independent gig workers, free lancers, rideshare drivers, and part-time workers, the American Rescue Plan of 2021 implemented a new threshold for reporting credit, debit, or prepaid card payments. Effective in 2023, Form 1099-K reporting is now required for payments exceeding $600 on digital payment processors such as Venmo or PayPal, as well as online sales platforms like Airbnb, VRBO, Esty, and eBay.

Under previous law, independent workers had to exceed $20,000 in sales of goods and services and have more than 200 transactions in one year before a Form 1099-K was required. The new rule was supposed to go into effect in 2022, but because so many more people will fall under this new reporting requirement, the IRS delayed it one year to allow more time for third-party processors to comply. Unless Congress acts, millions of individuals with e-commerce businesses should anticipate that the $600 reporting threshold will apply to their online sales in 2023.


Estate and Gift Tax Exemption

The estate and gift tax exclusion amounts born out of the Tax Cuts and Jobs Act (TCJA) continue to increase to all time highs. In 2023, the lifetime exemption amount is $12.92 million adjusted for inflation ($25.84 million per married couple), an $860,000 increase from 2022. Next year, taxpayers can transfer up to an estimated $13.66 million out of their estate ($27.32 million per married couple) without generating a tax bill in 2024. If you’re married, your spouse can also inherit any unused lifetime exemption by filing an estate tax return on Form 706 upon the death of the first spouse.

The annual gift tax exclusion also increased to $17,000 in 2023, up from $16,000 in 2022. The annual limit will go up to $18,000 per individual in 2024. Unless the TCJA is repealed or extended by Congress, there’s now only two years left until the exclusion amounts sunset in 2026.

Individuals who include generational gifting as part of their wealth planning strategy and wish to capitalize on this tax-saving approach should consider making wealth transfers sooner rather than later. Be sure to discuss your situation with your advisor to ensure that other wealth planning goals have been met before proceeding with additional gifting. Top of Form


Charitable Giving

Implementing a tax-smart strategy for your year-end charitable giving is an effective way to reduce your tax liability if you expect to realize significant income in 2023 and 2024. For those who itemize, the deduction limit for a cash gift to a qualifying public charity is 60% of adjusted gross income (AGI). We’ve highlighted a few tips below:

  • “Bunching” your donations through a donor-advised fund is one way to maximize tax savings in the contributing year.
  • Donating appreciated non-cash assets, such as real estate, art, or publicly traded stock, can eliminate capital gains tax.
  • Establishing a charitable remainder trust or charitable lead trust is another strategy to consider.

Talk with your advisor to learn about more charitable giving strategies that may be best for your situation.


Energy-Related Tax Credits

In an effort to accelerate the use of clean energy and sustainable living, the Inflation Reduction Act of 2022 (the Act) implemented widespread incentives to encourage taxpayers to invest in energy-efficient home improvement projects. And in 2023, there’s a significant boost to the credit. Up from 10% in 2022, homeowners can now receive a 30% credit for the cost of eligible systems, equipment, and materials placed in service between January 1, 2023 and January 1, 2033. In addition, the Act expanded previous lifetime limits with annual limits, opening the doors to considerable tax savings, especially if homeowners strategically spread-out qualifying home improvement projects over the 10-year duration of the credit.

If you’re considering making improvements to your home, connect with an advisor to discuss what qualifying assets may yield the highest tax savings and on what timeline.


Electric Vehicle Tax Credits

Along similar lines, the Act also provides clean energy credits for purchasers of electric vehicles beginning on January 1, 2023 through December 31, 2032. Taxpayers may qualify for a maximum tax credit of $7,500 for new electric vehicles and up to $4,000 (limited to 30% of the purchase price) for used electric vehicles.

In order to take advantage of the tax break, there are a number qualifying parameters that must be met to qualify. Taxpayers must fall under certain income thresholds with modified adjusted gross income under $150,000 for single filers and $300,000 for joint filers. Further, the IRS placed price caps on vehicles to qualify for the credit: $80,000 for trucks, vans, and SUVs; $55,000 for sedans, and $25,000 for used vehicles, and also stipulated final assembly requirements in North America for manufacturers of qualifying vehicles.


Tax-Loss Harvesting

Market volatility has consistently reared its ugly head in the last years, making it especially important to manage the timing of gains and losses prior to year-end. This year is no exception. Harvesting unrealized losses within your portfolio may reduce your overall tax liability, offering investors the ability to turn a loss into a potential win.

In 2023, taxpayers are able to deduct a maximum net capital loss up to $3,000 per tax year and roll over any unused losses into subsequent years to offset future gains. Fortunately, the losses never expire.

As you navigate the timing of your investments before year-end, be careful not to violate the “wash sale rule,” a rule preventing investors from taking a loss on an asset purchased 30 days before or after the loss trade date. To keep your position, you could acquire the same asset and then sell the original loss position 30 days later. To ensure that you can recognize the loss in 2023, this transaction should be completed no later than November 29.


Year-End Planning Moves

Contact your BPW advisor at (805) 963-7811 to help you implement year-end tax planning strategies to minimize your tax burden in 2023 and into the next few years.