Schenley Year-End Tax Strategies

December 4, 2023     

As we are quickly approaching the end of the year, we should all be thinking of actions we can take before year-end to reduce our taxes. For many of us, this is not a fun topic to think about. We thought it would be helpful to remind you of a couple of tax tips you can use with the help of your advisor or on your own. Below are five tax saving strategies to do before the end of the year.

#1: Complete Your Annual IRA Contribution:

    • In 2023 you can contribute $6,500 plus a $1,000 catch up provision if you are 50 or older. These can be towards either your Traditional IRA or Roth IRA. We encourage our clients to contribute to one of these accounts regardless of their income threshold.
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    • For 2023, the income limits to make a deductible contribution to a Traditional IRA are $116,000-$136,000 for MFJ or $73,000-$83,000 for MFS (along with Single filers). Although you will ALWAYS be able to make a nondeductible contribution to a traditional IRA, regardless of your level of income.
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    • Another alternative is the Roth IRA. This allows an individual to contribute after-tax money to grow tax free and have the chance to be completely tax free upon a qualified withdrawal. The income limit for a ROTH IRA in 2023 is $138,000-$153,000 for single filers and $218,000-$228,000 for Married filing jointly. If you are above these thresholds, consult with your tax advisor on options such as making a nondeductible Traditional IRA contribution or completing a Roth conversion.

 

#2: Maxing out your contribution to your company 401(K) plan.

    • Another end of year tax item is maxing out 401(K) contributions. Individuals are allowed to place $22,500 plus a $7,500 catch-up if 50 or older and up to $66,000 for the combined employee and employer contribution. For most people, their 401(K) is the largest retirement asset. Maxing out this vehicle can is a tax efficient way to fund your retirement.

 

#3: Tax Loss harvesting

    • It is wise to look at your individual investment portfolio and sell the losers you have been carrying in your portfolio and offset the losses by selling some stocks which you have experienced gains. Crossing your gains with your losses will result in no taxes being owed (0%-20% capital gains tax) on your investment gains, if done properly.
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    • In addition, this will rebalance your portfolio so that you can invest in new companies which will grow and produce dividends in the future.
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    • Due to recent market declines, many of our portfolios may be carrying losses. If your losses exceed your gains, you can carry these forwards to be used in the future. Beware, you can use up to $3,000 of losses per year in future years to offset capital gains. This is called a loss carry forward.

 

#4: Create a Donor Advised Fund

    • As the standard deduction in 2023 is high, ($13,850 for single and $27,700 for joint filers) less Americans are itemizing on their tax returns. It is smart to initiate a charitable fund for yourself with the goal of making charitable gifts in the future.
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    • This technique is called a Donor Advised fund. The Donor Advised Fund could be set up at The Pittsburgh Foundation or with your advisor at Schwab. This fund is used for making the gifts you normally make to your favorite non-profit organizations. Although you can “bunch” your gifts together and make one large gift to your Donor Advised Fund (DAF) you will have a large tax deduction in the year you make the donation. Individuals” bunch” their expected donations for multiple years into one year’s donation by contributing to a donor advised fund. The taxpayer will then be able to deduct the full amount contributed to this fund as a charitable contribution. The benefit of the DAF is the ability to make the gifts in the future while receiving an instant tax deduction in the current year when they make the contribution to the DAF.

 

#5: Required Minimum Distributions:

    • It is very important to remember to take your required distribution from your Individual Retirement Account, (IRA) if you are 73 or older. The penalty for missing this distribution is 25% of the amount not taken.
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    • You can better utilize your Required Minimum Distribution (RMD) by making a gift to a non-profit organization. This strategy is highly effective, as you will NOT pay income tax on the amount which you gift to a 501 (c) (3) organization.
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    • If you are trying to figure out how to efficiently take your RMD without incurring a large tax in the current year, you may be interested in a Qualified Charitable Distribution. A Qualified Charitable Distribution allows the IRA owner to make a gift of up to $100,000 to a qualified charity without paying taxes on the Required Minimum Distribution. You could also make this $100,000 gift to your Donor Advised Fund annually. You would in turn give gifts from your donor advised fund to charities for many years as the funds grow.

 

We assist our clients in explaining and completing one or all these tax saving strategies each year. We begin reviewing and talking with our clients in August of each year to ensure we can complete each process by year-end