2023 Taxes: Time to Start Planning

Key Points – 2023 Taxes: Time to Start Planning

It’s Not About How Much You Make, It’s About How Much You Keep
You Can Control Your Taxes More So in Retirement Than at Any Other Time of Your Life
Some Tax Planning Strategies to Consider to Get Ahead of Your 2023 Taxes
12 Minutes to Read | 23 Minutes to Watch

2023 Tax Planning Season is Underway

Another tax filing season is in the books, which is probably a big relief for some of you and our CPAs. But that doesn’t mean it’s time to take an out-of-sight, out-of-mind approach with your tax documents and 2023 taxes. Why? Because 2023 tax planning season is underway. Dean Barber and Bud Kasper will share why now is the optimal time to take advantage of tax planning opportunities so that tax filling won’t be so stressful in the future.

Looking at Tax Reduction Strategies

If you’re a regular listener of America’s Wealth Management Show, you know that tax planning is one of Dean and Bud’s favorite show topics. When you’re in retirement, there are some things that you can control and some things you can’t control. Taxes are one of the things you can control in retirement if you understand forward-looking tax planning. Our team of CFP® Professionals and CPAs work side by side to develop tax reduction strategies that support your broader goals for retirement and beyond.

“The tax planning element of the over-arching financial plan can put more dollars in your pocket than any other part of the plan.” – Bud Kasper

Speaking of tax reduction strategies, make sure to download a copy of our Tax Reduction Strategies guide. It’s designed to help show you how to pay as little tax over your lifetime rather than just one year. Download your copy below!

Download: Tax Reduction Strategies

It really goes without saying, but as long as you live in the United States and either have money or make money, taxes are going to be a fact of life. So, what can you do right now to start lowering the tax burden over your lifetime?

First, you need to be aware of any changes in the tax code that could impact you. That can be difficult to keep up with, which is why it’s so important to work with a CFP® Professional and CPA together. Our CFP® Professionals are in constant communication with our CPAs between reviewing financial plans and with questions about the tax code. They’re always trying to go the extra mile to educate themselves so that they can pass that financial education along to clients and prospective clients.

The Ability to Control Your Taxes in Retirement (and When Planning for Retirement)

When you think about taxes, you need to think about them as an expense in retirement. The two things that people will typically spend the most money on in retirement are taxes and health care.

“With health care, people will shop for insurance if they retire before 65. And once they turn 65, they’ll get on Medicare and look for the right supplemental plan. They do those things because they believe it’s in their control. Yet when it comes to taxes, people just believe that they are matter of fact. They are what they are and you’re going to owe what you’re going to owe. But the truth is that you have a unique ability to control your taxes during your retirement years unlike any of time of your life.” – Dean Barber

Being able to control your taxes in retirement begins before you retire. The reasoning behind that is because everything that you put your money into to save for retirement is going to have a tax consequence when the money comes out.

The Tax Buckets

You’re going to have a bucket of money that you’ve already paid taxes on—it could be in a brokerage account titled in a trust or a joint tenancy—where capital gains, interest, and dividends are taxable each year. That’s your taxable bucket. Money has already been paid on that.

Then, you have your tax-deferred bucket. That’s your traditional IRA, traditional 401(k), or non-qualified tax-deferred annuity. You may have paid taxes on some of the money before it went in, but all the earnings and deductible contributions have never been taxed before. The delay of taxation on that can allow it to compound better. But when you start taking that money out, you have a taxable event. It’s taxed as ordinary income.

That brings us to our favorite vehicle, which is the Roth IRA and 401(k). That’s the tax-free bucket. You put money in after you’ve paid the tax and then all the earnings are tax-free. However, there are some stipulations. Money needs to be in that Roth IRA for at least five years and you need to be at least 59½ before you can start taking the money out tax-free. Roth IRA contributions can always be taken out tax-free. There’s no five-year timeframe on Roth IRA contributions.

“It’s complicated, but where you’re saving that money before retirement will have a big impact on how much you’ll get to keep when you start taking money out during your retirement years.” – Dean Barber

Understanding the SECURE Act 2.0

We want to talk a little bit more about the tax-free bucket since it’s a very important part of this discussion on 2023 tax planning and tackling your 2023 taxes. In December 2022, the SECURE Act 2.0 passed and it became effective on January 1, 2023. One exciting aspect of SECURE 2.0 is that corporations can now offer a tax-free (Roth) match to contributions that are going in.

“It’s encouraging that we have that direction to go to because it makes it a little bit more pure in terms of contributions and matches coming in tax-free.” – Bud Kasper

Looking Ahead to 2026

Arguably the biggest reason to be aware of the opportunities available to you during the 2023 tax planning season is because of what’s lurking in 2026. On January 1, 2026, we’ll go back to the higher tax rates that were in effect prior to the Tax Cuts and Jobs Act. There’s an opportunity to do Roth conversions prior to them likely having more tax in 2026.

“We need to address that now while we can. I’ve never done more Roth conversions for people than I did last year and I think we’re going to see the same thing this year.” – Bud Kasper

The Pros and Cons of Roth Conversions

Roth conversions simply take money from a traditional IRA or 401(k) and converting it to a Roth IRA or 401(k). When you do that conversion, it causes a taxable event in the year that you do it. You’ll pay taxes one time, but once it gets into the Roth, all the future earnings and distributions are tax-free.

Roth conversions oftentimes make a lot of sense of people, but you need to see how they will impact your overall plan before doing them. Because they cause result in unattended consequences that make it not worth doing Roth conversions in the first place. Here’s an example from Dean and a client he met with last fall who was recently widowed.

“She and her husband were doing Roth conversions before her husband passed away, but wanted to know if she should still do them in 2022. When we went in and plugged in the Roth conversion into our tax calculator, we saw that the answer was no. Her income level was at a point where only a couple thousand dollars of her Social Security was taxable. The moment we started doing more Roth conversions, 85 cents of every dollar up to almost $30,000 of her Social Security was taxable because she’s a single filer now.” – Dean Barber

So, she was fine with not doing the Roth conversions. It means that she would have to leave more in a traditional IRA for her children, which is not as ideal as the tax-free Roth IRA, but when that much more of her Social Security was becoming taxable, it wasn’t worth it.

The Impact of the Tax Cuts and Jobs Act Sunsetting in 2026

The closer we get to 2026, the more you’re going to hear about the Tax Cuts and Jobs Act sunsetting. There are a few more things we want to touch on that are critical when it comes to planning around your 2023 taxes season and your retirement. Besides bringing down the marginal rates a little bit, the Tax Cuts and Jobs Act almost eliminated the ability to itemize on your tax return. So, most people today are taking the standard deduction.

When the Tax Cuts and Jobs Act sunsets, it’s going back to how it was before. So, why we would bring that up when talking about 2023 taxes? We’ll let Dean explain why.

“If you’re simply doing the standard deduction in 2023, 2024, and 2025 and are charitably inclined, maybe giving $10,000-$15,000 a year to charity—you can do a donor-advised fund. You can make all three years of those charitable contributions during this 2023 tax planning season, get the benefit of deducting that and itemizing on your tax return. You can simply take the money out of the donor-advised funds and write the checks to the different charities. Therefore, you get the benefit of getting a tax deduction for that contribution. Then, in 2026, you can go back to your normal contributions and start to deduct those and itemize again. That’s assuming there are no changes in the tax code between now and then.” – Dean Barber

Qualified Charitable Distributions

Donor-advised funds aren’t the only option to consider for those who are charitably inclined. If you’re 70½ or older, don’t forget about Qualified Charitable Distributions. You need to think about doing QCDs out of your IRA early in the year. With a QCD, money comes directly out of your retirement account, goes directly to charity, and never shows up on your tax return.

A New Required Minimum Distribution Age

Let’s also talk about another important age number. It’s 73, which is the new Required Minimum Distribution age. That’s another change that took place with SECURE 2.0. If you’re going to be 73 this year, you must take an RMD. So, why should you do your QCDs early?

“Your QCDs will reduce the amount of your Required Minimum Distributions. If you went into the year thinking, ‘This is how much I need to take out. I might as well take it out now,’ you then need to pay taxes on the whole thing. If you’re charitably included, do that QCD first and it will reduce the amount of the Required Minimum Distribution.” – Dean Barber

Before we shift gears with discussing 2023 taxes and why it’s time to start planning for them, we’d be remiss if we didn’t share one of our newest retirement planning resources with you. It’s our 2023 Retirement Planning Calendar. It includes some of those milestone ages like 70½ and 73 that you need to be aware of, as well as several other important dates and events throughout the year that can impact your retirement. Download your copy below!

Download: 2023 Retirement Planning Calendar

The True Meaning of Tax Planning

Now that we’ve shared a few specific tax planning strategies to consider, we want to dive a little bit deeper into the true meaning of tax planning to help with planning around your 2023 taxes and for future years. The technique of tax planning is a forward-looking projection of your tax liability over your lifetime.

“To get it done properly, you need to have a CFP® Professional start the whole process. A lot of people will think that tax planning is all about their CPA. The CPA needs to be there, but they need to follow the CFP® Professional that has made the complete plan. That way the CPA has the entire picture. They’ll then know all the resources and spending objectives. They’ll know how much Social Security is going to be there and what inheritances are expected in the future, etc.” – Dean Barber

Seeing the Difference Tax Planning Can Make

Once you have that understanding, you should be thinking, “We need to spend money every year to enjoy our retirement. What account should we get that money from? How much should we spend and in what order should we spend that money?” After the CPA comes into review your plan from a tax planning perspective, you can see the difference if you were to just blindly spend or have a strategic spending strategy to pay as little tax as possible over your lifetime.

“I was working with one of our CFP® Professionals on a case about a month or two ago. Our CFP® Professional suggested that we adjust someone’s spending or where it was coming from and then sprinkle in some Roth conversions on a very tactical basis. The difference in the total tax over that person’s lifetime—assuming they lived until 95—was more than $360,000.” – Dean Barber

Doing Damage Control Before the Damage Is Done

Remember how we said that taxes are one of your biggest expenses in retirement? Well, imagine subtracting $360,000 from that expense. You can control your taxes, but you need to have a CFP® Professional create a comprehensive financial plan that a CPA reviews from a tax planning perspective. The CPA is reacting when preparing a tax return. You really want the CPA to be proactive and doing damage control before the damage occurs by creating that plan.

“It gives the client the ability to control their own destiny and helps them realize how much tax they may or may not want to pay in a given period. They might have some specific uses for the money and won’t want to do a Roth conversion in a certain year. But it’s our job to show the benefit of the strategy, have it confirmed by the CPA, and then let the client make the final decision.” – Bud Kasper

When to Claim Social Security

The other thing that will come into play with Roth conversions techniques is the timing of when a person should claim their Social Security. The reason that that’s important is because that Social Security is taxed different than any other asset. Social Security by itself is a tax-free source of income.

Calculating Provisional Income

However, people disqualify themselves from having their Social Security be tax-free by having too much provisional income. Provisional income is a special calculation that’s used to determine how much, if any, of your Social Security is taxable. One of the things we know causes more Social Security to become taxable is more ordinary taxable income. When you’re doing a Roth conversion from a traditional to a Roth, that’s causing more ordinary income.

“You need to ask yourself, ‘If I want to get Roth conversions done but am eligible for Social Security at 62, should I start my Social Security? Or will it interfere with my ability to convert as much money as I want to in retirement?’ What’s the right mix there? If the financial plan is properly built, the CPA can show you what your Social Security benefit will be in the future if you delay claiming it. You can see how much more money you can convert with paying the same amount in taxes. It allows you to see the overall impact on the plan.” – Dean Barber

Sometimes, just simply doing Roth conversions is a compelling reason to delay claiming Social Security. If you’re doing Roth conversions and you get to 71, 72, and 73, and all your income off the Roth is tax-free, that means your Social Security is going to be tax-free too.

And you want provisional income because you probably can’t live on Social Security by itself. That’s where that planning really comes into play. It’s the coordination of your money in the three tax buckets in terms of how much you’re spending and when that can make a huge difference in your retirement.

Something to Think About When You Get Your Next 401(k) Statement

We’re just about to wrap up with this article on 2023 taxes and why it’s time to start planning. We started out the article by talking about why not to stash way your tax documents too far out of sight and to take advantage of some tax planning opportunities to better position yourself for future tax filing seasons. This was also on Dean’s mind when he recently looked his 401(k) statement.

It showed Dean how much his Social Security was going to be how much income he was going to get out of his 401(k) based on his contribution limits, age, etc. Dean got a chuckle out of it because he knew that wasn’t right. But to a lot of people heading into retirement, that 401(k) statement is their version of a financial plan.

“Guess what? Even if those numbers are right, that’s not how much money you spend. And guess what? Even if that number is right and that is how much you spend, it’s not how much money you’re going to get because you don’t know what the tax impact is going to be when these things turn on.” – Dean Barber

It’s Not About How Much You Make, It’s About How Much You Keep

That’s why we can’t stress enough that you realize that it’s not about how much you make. It’s about how much you keep. Controlling your taxes allows you to keep more of what you make. That’s why it’s critical to develop a financial plan with a CFP® Professional and having a CPA working together with them. It allows you to control your taxes and pay less tax than you ever thought was possible.

We want to show you what this will look like for you, and we have a couple of ways of doing so. First, we encourage you to take our financial planning tool for a spin so you can see how these tax planning techniques can work for you. This is the same tool that our CFP® Professionals use with our clients, and you can use it at no cost our obligation. Simply click the “Start Planning” button below to begin building a plan that’s unique to you.

START PLANNING

We also want to show you what it’s like to work with a CFP® Professional and CPA that work side by side. We can do that and show you the true meaning of tax planning and financial planning during a 20-minute “ask anything” session or complimentary consultation. To schedule a meeting with one of our CFP® Professionals and/or CPAs, click here. We can meet with you in person, virtually, or by phone depending on what works best for you.

2023 Taxes – Time to Start Planning | Watch Guide

Introduction: 00:00
What Can You Do Now to Start Lowering Taxes?: 02:00
2026 Tax Rates Sunset & Roth Conversions: 7:22
Qualified Charitable Distributions: 13:17
What Are Tax Planning Techniques?: 14:52
Conclusion: 22:05

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The views expressed represent the opinion of Modern Wealth Management, LLC, an SEC Registered Investment Adviser. Information provided is for illustrative purposes only and does not constitute investment, tax, or legal advice. Modern Wealth Management, LLC does not accept any liability for the use of the information discussed. Consult with a qualified financial, legal, or tax professional prior to taking any action.