Even though the deadline for filing 2023 income tax forms is months away, the time to consider certain tax-related matters is now—before the year ends. Thanks to recent legislation and steep inflation, some year-end tax issues are different this year.
Bottom Line Personal asked our tax expert Maryann Reyes, CPA, what our readers should be thinking about now…
You can gift more money without tax consequences. The annual gift-tax exclusion—the amount one person can give to another without tax consequences—rose to $17,000 in 2023. What that means: A married couple with three grown children could remove more than $100,000 from their future taxable estate this year if each spouse gave $17,000 to each of their children…and up to $17,000 apiece to each of their grandkids, or anyone else for that matter. Even better: If they make these gifts before the end of 2023, they can do it all again in 2024, shrinking their future estate by a meaningful amount.
Important: While few families are concerned about estate taxes these days—because the estate-tax exemption is $12.92 million—that exemption is slated to be rolled back to around $6 million as of January 1, 2026, and there’s no way to be sure it won’t be slashed even further.
Few taxpayers will be able to deduct charitable contributions. As recently as 2021, taxpayers could deduct certain charitable donations without itemizing. But in 2023, only taxpayers who itemize can deduct charitable donations.
But: Only around 10% of taxpayers itemize these days—because the standard deduction has been on the rise—so giving to a good cause no longer creates a tax break for most Americans. In 2023, the standard deduction for married couples who file joint returns reached $27,700, up from $25,900 in 2022 and just $12,700 in 2017. The standard deduction for single filers now is $13,850 (there are additional deductions for filers over age 65 and for blindness). Itemizing makes sense only if a taxpayer has sufficient itemized deductions to exceed these increasingly steep standard deduction amounts.
If you intend to donate a significant amount to charity before the end of this year: First determine whether you’re likely to itemize your 2023 taxes or take the standard deduction.
If you will take the standard deduction—and you likely will—consider postponing your charitable gift until early next year, perhaps even longer. The odds that it will make sense for you to itemize and receive a tax break for your charitable giving increases if you make multiple years’ worth of sizable donations all in the same calendar year rather than spread them out into equal annual gifts.
Reminder: Your deductible charitable contributions for a year are capped at 60% of adjusted gross income for cash donations or 30% for most noncash donations.
You might qualify for a 0% long-term capital gains tax rate even if your income is in the low six figures. In 2023, the unbeatable 0% tax rate on long-term capital gains is available to married people filing joint returns whose taxable income is as high as $89,250, a big increase from 2022’s limit of $83,350. And that’s taxable income. With the standard deduction now at $27,700, a married couple with total income in the neighborhood of $115,000 still could qualify for this 0% rate. For single filers, taxable income can be as high as $44,625.
Check with your tax and/or financial planner before year-end to estimate where your taxable income is likely to land for 2023. If you’re married and it’s below that $89,250 threshold—or single and it’s below that $44,625 threshold—consider selling off some appreciated investments before year-end to take advantage of that 0% tax rate. Warning: The long-term capital gains tax rate applies only to assets held for more than one year. Assets held one year or less typically are taxed at your ordinary income rate.
There’s a compelling new way to remove money from a traditional IRA. Starting this year, people age 70½ or older can make a onetime qualified charitable distribution (QCD) of up to $50,000 from a traditional IRA (or several IRAs) directly to a charitable remainder trust or a charitable gift annuity. This arrangement offers financial benefits for both the donor and the charity—the donor and/or the donor’s spouse receives annual income for life from the trust or annuity, then the charity gets what’s left after the last income beneficiary passes.
This is particularly appealing if the taxable income created by taking required minimum distributions (RMDs) from your tax-deferred accounts threatens to push you into a higher tax bracket and/or increase your Medicare premiums in two years (Medicare premiums are based on modified adjusted gross income from two years previous). The QCD can satisfy all or part of your RMDs without generating significant taxable income in 2023 (and without requiring you to itemize—although you still need written acknowledgment from the charity for any QCD of $250 or more). Also, the money transferred to the charitable remainder trust or a chartiable gift annuity is not considered taxable income, though the annual income received each year from the charitable remainder trust or charitable gift annuity is.
Money given to charity this way does not qualify for the charitable contribution tax deduction ($50,000 given to a charity but not through a QCD would qualify)—but, as noted, few people can claim that deduction these days anyway.
A great new option for unused 529 savings is on the horizon. Do you have assets languishing in a no-longer-needed 529 plan? Parents and grandparents often fund these plans to help their descendants pay future college bills, but some kids don’t go to college…and others go for free, perhaps by attending a military school like West Point. A new rule will allow certain 529 assets to be rolled over into Roth IRAs of the beneficiary of the 529 plan without generating the taxes and penalties that typically apply when money is withdrawn from a 529 for non-educational purposes. This rule doesn’t take effect until 2024, but it’s worth noting now so that you don’t remove money from a 529 this year when a better option will be available soon.
To be eligible: A 529 plan must have existed for at least 15 years, and the contributions that are rolled over must have been made at least five years prior to the rollover date. There’s a lifetime limit of $35,000 for these 529-to-Roth rollovers, and Roth IRA annual contribution limits apply. The income caps that sometimes prevent high earners from making Roth contributions don’t apply here.
Note: The Roth created will belong to the 529 beneficiary, not the person who funded that 529. This beneficiary might be decades from retirement age—but that’s all the more reason to do this. If you transfer $35,000 into a Roth for someone in his/her mid-20s and that Roth earns 7% annual returns, it will be worth more than a half million dollars when this person reaches retirement age in 40 years. And because the money is in a Roth, this heir won’t have to pay taxes when it’s withdrawn.
You don’t have to take RMDs this year if you’re 72. The starting age for required minimum distributions from IRAs and 401(k)s has been ratcheting up in recent years, and in 2023, it rose from age 72 to 73.
Rule of thumb: If RMD rules don’t require you to remove money from your tax-deferred accounts and you don’t need the money to pay your expenses, the smart move is to leave money in the tax-deferred accounts as long as possible. Potential exception: If you’re likely to land in a lower-than-normal tax bracket this year, it might make sense to remove some money from your tax-deferred retirement accounts by year-end even if you’re not required to. This will reduce the amount that RMD rules require you to remove from the account in future years when you’re in a higher tax bracket.
SIMPLE and SEP IRA plans now can accept Roth contributions. Prior to 2023, SIMPLE and SEP IRA plans could accept only tax-deferred contributions, like traditional IRAs.
But: Even though SIMPLE and SEP IRA plans are allowed to accept Roth contributions, most don’t seem to be doing so. Still, if a SIMPLE or SEP IRA is available to you through your employer, it’s worth asking if Roth contributions are possible or if they will be in 2024.
If you’re self-employed—or own a small business that has few or no employees other than yourself: Consider contacting SEP IRA providers such as Charles Schwab, Fidelity Investments or E-Trade to ask if they offer SEP Roth contributions for 2023 or if they will in 2024. SEPs have generous contribution limits—a self-employed person typically can contribute up to $66,000 or 25% of his net business earnings each year, whichever is lower—so once Roth SEPs are available, they’ll be a great way for the self-employed to quickly create a large pool of retirement savings that are out of reach of future income and capital gains taxes.
The biggest reason to roll a Roth 401(k) into a Roth IRA is about to disappear. One strange quirk of Roth rules has long been that while Roth IRAs don’t have lifetime RMDs, Roth 401k(s) do—as do Roth 403(b)s and other employer-sponsored Roth plans. The traditional workaround was for people who had Roth 401(k)s to roll that money into a Roth IRA before they reached RMD age. That’s no longer necessary—as of 2024, RMDs won’t apply to any of these Roths. If you have money in a Roth 401(k) that has reasonable fees and investment options, you can leave it where it is.