Take action now to reduce your 2023 income tax bill – part two

reduce your 2023 income tax bill

For many people, 2023 will be a confusing year to plan for taxes due to various issues. These include erratic markets, rising interest rates that are stabilizing, and notable modifications to the regulations governing retirement planning. You still have time to put year-end tax preparation techniques into place, which might lower your annual income tax burden, even though there is still much uncertainty. Here are some actions on how to reduce your income tax bills in 2023, along with those pointed out in the first part of this two-part blog series.

Leverage your charitable giving options

You can enhance the amount that your itemized deductions include from charitable contributions in several ways. For instance, you may give away valuable possessions you’ve owned for at least a year. You can deduct the fair market value of donated investments and the cost basis for nonstock donations, in addition to avoiding capital gains tax and, if applicable, the net investment income tax on the appreciation. Remember that the deduction for charitable contributions is subject to adjusted gross income, or AGI, based limitations.

You may also choose to make a qualified charitable distribution (QCD) from a retirement account that has required minimum distributions (RMDs), even though it won’t affect your charitable contribution deduction. After age 75, you may donate up to $100,000 annually (indexed annually for inflation) to a qualified charity. The payout is considered an RMD subtracted from your taxable income. Still, it does not count toward your charitable deduction.

Execute a Roth conversion

Because you can convert more shares without increasing your income tax obligation, recent market dips may also make this a wise time to consider converting part or all of your traditional IRA to a Roth IRA. Yes, the amount converted will be subject to income tax in 2023. However, you can reduce the impact by converting solely to the maximum amount allowed under your current tax band.

Furthermore, the long-term advantages may offset the immediate tax impact. The cash will grow tax-free after conversion. If you have owned the account for at least five years, you can often take “qualified distributions” tax-free. Roth IRAs are exempt from RMD requirements. Additionally, you can take out tax-free and penalty-free withdrawals from a Roth IRA for qualified higher education expenses (with no cap), eligible birth or adoption expenses (up to $5,000), and qualified first-time home purchase (up to $10,000).

However, remember that you can have a more significant AGI after a Roth conversion. This could reduce the tax advantages you receive concerning your modified AGI that phase out.

Review your estate plan

Although your estate plan shouldn’t impact your income taxes in 2023, it’s a good idea to examine it now because the TCJA’s significant gift and estate tax exemptions will expire at the end of 2025. In 2018, for instance, the TCJA almost doubled the exemption to $12.92 million (or $25.84 million for married couples). Reverting to the $5 million pre-TCJA level (adjusted for inflation) could significantly impact your estate strategy.

Additionally, some estate planning techniques might be more appealing given the persistently high-interest rate environment. For instance, gifts to charitable remainder trusts and qualifying personal dwelling trusts typically have a reduced value at high-interest rates.

How to reduce your income tax bills

Naturally, you should also always consider the time-tested strategies for lowering your taxes, like delaying income and increasing spending. Of course, these strategies are useless if you anticipate being in a higher tax bracket in 2024. We can assist you in charting the best path for your situation. Contact our RRBB advisors if you have any questions.

© 2023


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