Retirement

Year-End Tax Planning for 2023

By Chris Duderstadt

November 14, 2023

Year-End Tax Planning for 2023

Key Points – Year-End Tax Planning for 2023

  • What Should People Be Thinking About While Addressing Year-End Tax Planning for 2023?
  • Tax Compliance vs. Tax Planning
  • A Popular Time for Roth Conversions and QCDs
  • Considering Tax Credits
  • Thinking About Your Spending for 2024
  • Understanding Capital Gains Taxes
  • 6 Minutes to Read | 11 Minutes to Watch

It’s Time to Do Year-End Tax Planning for 2023

When our team at Modern Wealth talks about it being the most wonderful time of the year, it isn’t just because the holiday season is upon us. It’s also a wonderful time to do some year-end tax planning for 2023. Managing Directors Dean Barber and Marty James, CPA are going to discuss some key things to keep in mind while doing year-end tax planning for 2023 on the Modern Wealth Management Educational Series.

What Should People Be Thinking About?

When it comes to meeting with your CPA, a lot of people think that they need to do so in February or March before the end of tax season to address tax compliance. But there’s more to taxes and meeting with your CPA than tax compliance. There’s forward-looking tax planning and tax management that your CPA should be working with you on as well.

When we’re doing year-end tax planning for 2023, we’re not just looking at 2023. We’re looking at 2024 and beyond to see what tax planning opportunities are available to you. There weren’t any sweeping tax law changes in 2023, but there are some big scheduled changes on the horizon. We want to make sure that we’re planning for them as we’re doing year-end tax planning for 2023.

The big upcoming changes are scheduled for 2026 after the Tax Cuts and Jobs Act sunsets on December 31, 2025. So, if Congress does nothing to change that between now and then, tax rates will revert to the higher rates of 2017 starting in 2026.

It’s Roth Conversion Season

Just like last year, Marty and Dean are summing up one of the main themes of year-end tax planning for 2023 in three words: Roth conversion season. When you’re doing a Roth conversion, you’re converting a traditional IRA to a Roth IRA. While you’re required to pay tax on that conversion, the growth in the account from that point on is tax-free. By doing Roth conversions now before rates go up in 2026, you’re essentially doing them at a discount.

“A lot of times, we’ll wait toward the end of the year to do Roth conversions based on your tax bracket. But you might want to do them earlier if the market gives you the opportunity to do it.” – Marty James, CPA

How Do You Know Whether or Not to Do a Roth Conversion?

Roth conversions can be very appealing, especially leading up to 2026, but they’re not for everyone. There can be unintended consequences to doing Roth conversions. So, how do you know whether you should convert?

It’s tough to answer that question if you don’t have a forward-looking, comprehensive financial plan or a CPA that’s looking at that plan to understand the long-term impact of the Roth conversion. That’s why it’s critical for your CFP® Professional and CPA to be working together. While the Roth conversion is going to cost you in tax dollars this year, they can show you the potential long-term benefit of converting.

One of the things you should do is create a long-term tax plan that mirrors your financial plan. In your long-term tax plan, you’re looking into things like what your Social Security and pension income will look like and what your Required Minimum Distributions will be.

Remember that we have a progressive tax system—meaning that your dollars are taxed at lower rates before being taxed at higher rates. You can see in the future how your money will likely be taxed. For example, let’s say you’re currently in the 24% bracket. It’s critical to keep in mind that the 24% bracket will become the 28% bracket starting in 2026.

Looking at Different Tax Credits

Doing a Roth conversion in that situation might seem like a no-brainer with paying the tax at today’s lower rates. However, by doing that, you’re increasing your income. That means you need to look at tax credits, among other things.

A few examples of those tax credits include school vouchers and electric vehicles. There are 15 states right now that have school vouchers. Those are basically income-based with what you get on those, so you need to factor that into your tax cost. Another tax credit involving electric vehicles just went into effect in 2023. If your income crosses a certain threshold ($300,000 for married filing jointly; $150,000 for single filers), you don’t get the $7,500 credit for buying a clean vehicle.

What Does Your Spending Look Like for 2024?

Make sure you’re taking those different tax credits into account as you’re considering Roth conversions. What are your expenses going to be for next year? Do you need to buy a vehicle or put in a new HVAC system? Let’s look at spending for the upcoming year as a part of year-end tax planning for 2023 and figure out where that money is going to come from.

Dean was working with one of our CPAs recently on someone’s 2024 tax plan and were looking at doing a $25,000 Roth conversion. They were going to keep that person in the 22% bracket and avoid the IRMAA tax. But then that person told Dean and our CPA that they wanted to buy a new car next year that was going to cost them about $50,000. Dean and our CPA then decided against doing the conversion and taking the $25,000 out now and then against next year at the 22% bracket.

“If we waited until next year, Social Security was going to kick in, they’ll suddenly move into a higher bracket, and they reach the second IRMAA phase and are getting close to the third one. Just by taking the money out this year, we’ve saved them a ton in taxes.” – Dean Barber

‘Tis the Season for Stacking Contributions and Qualified Charitable Distributions

If you’re charitably inclined, Marty says that it’s worth thinking about stacking contributions to get over the higher standard deduction thresholds. Maybe you have enough liquidity so that you can stack all of it now depending on what your income is. For example, if you’re in the 22% bracket, you don’t want to blow yourself down into the 12% bracket or zero bracket.

“If you’re doing a Roth conversion and stacking some of those charitable contributions concurrently, that can make a big difference.” – Dean Barber

By doing them concurrently, it gives you a lot more room to do the Roth conversion in the tax bracket you want to do it in. Here’s something else to consider. Should you give all that money to charity in a given year or would you use a donor advised fund? Marty would go use a donor-advised fund, but it depends on your unique situation.

“I’m thinking of this in terms of the contributions I’ll be making over the next four or five years and am just going to do them now. In the donor-advised fund, I get to dictate in a later year where I want that money to go.” – Marty James, CPA

And don’t forget that if you’re 70½ or older, it might be a good idea to keep some money in traditional rather than converting as much as possible to Roth so you can utilize Qualified Charitable Distributions. QCDs allow you to give up to $100,000 a year directly from your IRA to charity without it showing up on your tax return.

The Ability to Control Your Taxes in Retirement

It’s important to realize that you have more control over your taxes in retirement than at any other point of your life. However, it does take some time and a lot of patience. Working with a CFP® Professionals and CPA together can take the emotion out of it and give you clarity about your tax situation as you’re doing year-end tax planning for 2023.

Tax preparation takes place in February, March, or April, but during that early part of the year, you’re really thinking about your tax plan. You’re actually implementing a lot of what we’ve talked about toward the end of the year. It becomes a situation to where the tax planning should already have been done by the time you’re doing tax preparation for the following year. And throughout the year, you’re managing your taxes.

Understanding Capital Gains Taxes

Marty has seen two instances in the past year where someone was in the 12% bracket but were buying a passive index fund. That fund was continuously growing, and one of them was in a no income tax state. If they would’ve harvested some of those gains each year, they could reset the basis. That way when they get into retirement, they wouldn’t have a capital gain to deal with.

“If you’re not looking at those types of things every year, something is going to get missed. We see people overpaying their taxes all the time, and it’s not because their tax return was done wrong. It’s because they’ve missed opportunities.” – Dean Barber

Are You Ready to Do Some Year-End Tax Planning for 2023?

We don’t want you to miss any tax planning opportunities. If you found the year-end tax planning tips for 2023 that Marty and Dean shared to be helpful, let’s see how some of them could possibly benefit you. If you have questions about year-end tax planning for 2023, schedule a conversation with us below.

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We can’t stress enough that the goal of tax planning is to pay as little tax as possible over your lifetime and not just in one year. Thinking long-term is key. Please don’t hesitate to reach out with any questions during this wonderful time of the year for tax planning.

Resources Mentioned in This Article

Investment advisory services offered through Modern Wealth Management, LLC, an SEC Registered Investment Adviser.

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.