P.J. DiNuzzo, CPA, president and chief investment officer for DiNuzzo Wealth Management, Pittsburgh. He is coauthor of Don’t Get Killed on Taxes: 20 of the Most Common Reasons You’re Sending Too Much Money to the IRS. DiNuzzo.com
Scattered throughout the Tax Code are oft-overlooked opportunities to trim your tax bill—or even score a free lunch. But if you wait until tax-filing deadlines are nearing, you will miss out on many of these opportunities. The time to act is now!
Bottom Line Personal asked tax expert P. J. DiNuzzo, CPA, about the tax-saving opportunities worth considering…
1. Take advantage of the 0% long-term capital gains rate. Married couples who file their taxes jointly and whose combined household taxable income is less than $89,250 now pay an impossible-to-beat 0% rate on long-term capital gains. Single filers qualify for this tax rate if their taxable income is below $44,625. These thresholds, which rose significantly this year due to inflation, apply to only taxable income, not gross income—so a married couple could easily have total gross income over $100,000 and qualify.
If your taxable income qualifies for this 0% rate, now is the time to sell appreciated assets. Consider selling sufficient assets to push you up to the top of the 0% bracket. Perhaps even consider taking steps to lower your taxable income so that you can sell even more investments at that 0% tax rate. Ways to reduce your taxable income…
Make contributions to tax-deferred accounts such as traditional IRAs, 401(k)s and/or HSAs.
Make withdrawals from Roth rather than tax-deferred traditional IRAs if you are already retired.
Make large charitable contributions, which can include contributions to a donor-advised fund if itemizing tax deductions…or if not itemizing, a qualified charitable distribution (QCD) from traditional IRAs to lower taxable income if you are eligible to do so or if you are 70½ or older.
If your taxable income lands above these thresholds, your long-term capital gains tax rate leaps all the way from 0% to 15%…or even 20% if your taxable income is above $553,850 ($492,300 if you’re single). But all is not lost.
Consider gifting highly appreciated assets to your heirs who qualify for this rate if your income is too high to realistically land in the 0% long-term capital gains tax bracket. You can gift up to $17,000 worth of assets in 2023 to anyone you like without creating gift- or estate-tax consequences. If you’re married, your spouse can do the same.
2. Avoid inflated Medicare premiums. What do Medicare premiums have to do with tax planning? Medicare recipients who have high taxable income are charged inflated premiums for Medicare Parts B and D due to the Income-Related Monthly Adjustment Amount (IRMAA). These steeper premiums kicked in for 2023 when Medicare beneficiaries’ income in 2021 topped $97,000, or $194,000 for couples filing jointly (adjusted for inflation annually), and they rise rapidly from there. Determining who will face these inflated premiums is complicated—IRMAA thresholds are based not on total income but on modified adjusted gross income (MAGI) with a few items added to it, such as tax-exempt interest income…and they’re based on income from two years earlier—high income in 2023 could increase your Medicare premiums in 2025, for example.
Landing on the wrong side of that $97,000/$194,000 threshold is costly for 2023—annual Part B premiums leap from $1,978.80 to $2,769.60, and Part D premiums climb slightly as well. And that’s just the initial IRMAA threshold—people in the top IRMAA bracket pay $6,726 per year for Part B. We don’t know the 2024 or 2025 thresholds yet, but keeping 2023 MAGI as low as possible can avoid or minimize higher Medicare premiums for 2025.
What’s truly insidious about IRMAA brackets is that they don’t phase in slowly—if you’re even $1 below a threshold, you pay the lower premium…if you’re $1 above it, you pay thousands of dollars more for Medicare. That’s a very expensive $1, so it’s worth taking steps to lower your AGI if you’re on track to land slightly above an IRMAA threshold.
Helpful: If your income has dropped in the past two years, there might be a way to avoid paying IRMAA premiums. As noted above, Medicare premiums typically are based on income from two years prior…but if your income has dropped in the last two years due to a “life-changing event,” you can appeal an IRMAA surcharge by filing Form SSA-44, Medicare Income-Related Monthly Adjustment Amount-Life-Changing Event, with the Social Security Administration. Qualifying life-changing events include marriage, divorce/annulment, death of a spouse, stopping or reducing work, loss of an income-producing property, loss of pension income or an employer settlement payment.
3. Aggressively harvest capital losses. Selling an investment that has lost money might be hard psychologically…but it can be great for tax planning. Not only can these capital losses be used to offset potentially taxable capital gains, up to $3,000 of the losses generated can be used to offset ordinary taxable income.
What’s more, additional losses can be “carried forward” and used to offset taxable income in future years. Think of the harvesting of money-losing investments as a way to create a tax asset that you can cash in to lower a future tax bill.
If you don’t want to sell an investment that has lost money because you expect it to rebound, consider selling it anyway and replacing it with a similar investment. If you want to repurchase precisely the same investment, you’ll have to wait more than 30 days to do so, otherwise the IRS’s “wash sale rule” will prevent you from claiming the loss on your taxes.
Two points worth noting: You can harvest tax losses only by selling declined assets held in taxable accounts, not assets in tax-advantaged retirement accounts…and tax loss carryovers cannot be left to your estate or heirs, though a surviving spouse typically can use these carryovers on the couple’s final joint tax return.
4. Generate a small amount of earned income in retirement, then put that money in an IRA. As of 2020, the age limits that once prohibited people over age 70½ from making IRA contributions were eliminated. Unfortunately, most retirees still can’t take advantage—no one can contribute more to an IRA than he and/or his spouse earned during that year, and most retirees have no earned income.
Consider this an additional incentive to take a part-time job or do some consulting work in retirement. Set a modest goal of earning $7,500 per year—$15,000 if married—so you can max out your annual IRA contributions. You could opt for a traditional IRA and not pay any taxes on the income in the year you earn it…or choose a Roth IRA to create a pool of savings that you can dip into five or more years down the road without generating income taxes. But if you’re collecting Social Security benefits and are under the full retirement age, watch the earnings limit—$21,240 in 2023 (with a higher limit if you reach full retirement age in 2023).
5. “Bunch” charitable gifts and other tax deductions. If you make charitable contributions each year, consider making larger contributions once every few years—the tax benefits might be significantly greater even if the total amount you donate is exactly the same.
It’s generally possible to deduct charitable gifts only if you itemize your taxes rather than take the standard deduction…and it makes sense to itemize only if your itemized deductions exceed the standard deduction, which in 2023 is $27,700 for couples filing jointly and $13,850 for single filers under age 65 and not blind. If you make substantial annual charitable gifts but often end up taking the standard deduction anyway and/or you itemize but your itemized deductions are barely above the current standard deduction, then your donations are creating few if any tax benefits for you.
Better: Bundle several years of your charitable gifts into a single year—you’ll end up with substantial itemized deductions in the year of this big contribution …and you can continue to claim the standard deduction in the other years.
Warning: Don’t bunch your contributions so much that you exceed charitable contribution deduction limits. The maximum allowable deduction for charitable gifts typically is 50% of AGI, though this can vary depending on the type of gift—it increases to 60% with cash gifts, for example.
6. Rent out your home—but only briefly. Section 280A of the Tax Code offers taxpayers one of those rare free lunches—you don’t have to pay taxes on income generated by renting out your home as long as you don’t rent it for more than 14 days within that year. This is the Augusta Rule—it was originally created for residents of Augusta, Georgia, who rented out their homes during the annual Masters golf tournament. The rent charged must be reasonable for the region on the rental dates, and the property cannot be rented out for more than 14 days—exceed this limit and all rental income is taxable. Both primary residences and vacation homes can qualify.