It’s that time of year again.
No, we aren’t talking about the holidays.
We’re talking about tax-planning time.
With the hustle and bustle that happens as we race towards a new year, it can be easy to overlook a few simple steps that can potentially help reduce the current year’s tax burden.
But First … What Changed in 2023?
In December 2022, President Biden signed into legislation the Consolidated Appropriations Tax Act of 2023, which includes tax-related provisions in the passing of the SECURE 2.0 Act.
“Secure 2.0 builds on the Setting Every Community Up for Retirement Enhancement (“SECURE”) Act, signed into law in December 2019, to improve retirement savings opportunities for workers,” noted Maya Brill, senior wealth strategist with Regions Private Wealth Management.
- SECURE 2.0 increases the required minimum distribution age to 73 starting on Jan. 1, 2023.
- Employers that do not offer a retirement plan can now offer a starter 401(k) plan (or safe harbor 403(b) plan) at a 3-to-15% of compensation deferral rate.
- The Act provides for a one-time election to make a qualified charitable distribution of up to $50,000 from an IRA to a charitable remainder trust or a charitable gift annuity, but only if such vehicle has been funded exclusively by qualified charitable distributions.
Looking to 2024 and Beyond
A few key provisions to SECURE 2.0 that go into effect in 2024 and beyond that may impact future taxes are as follows:
- Starting in 2024, required minimum distributions will no longer be required from Roth accounts in employer-sponsored retirement plans.
- A new provision that requires most new employer-sponsored retirement accounts to automatically enroll workers and make automatic contributions ranging from 3% to 10% for plans starting in 2025. Note that existing plans are grandfathered. Automatic contributions are then increased by 1% each year for the next 5 years (not more than 15%). Employees can elect out of the automatic contributions.
- Effective for plan years beginning after Dec. 31, 2023, the amount of certain student loan payments may be treated as qualified plan contributions so that the employee may receive a matching contribution.
- For tax years after Dec. 31, 2023, taxpayers are permitted to make tax-free and penalty-free rollovers of up to $35,000 from 529 education plans into Roth IRAs.
- Beginning Jan. 1, 2025, the Act boosts the amount taxpayers aged 60-63 may make as catch-up contributions to their employer-sponsored retirement accounts. The increased catch-up amount will be the greater of $10,000 or 150% of the regular catch-up contribution amount for the year.
“Another notable date to be aware of when planning for future tax years is the expiration of the Tax Cuts and Jobs Act, scheduled to sunset at the end of 2025,” said Brill, who authored Regions Private Wealth Management’s recently published 2023 Year End Planning Guide. “This could potentially bring back higher tax brackets and itemized deductions, though with the election year still ahead, it is possible this could be extended.”
According to Brill, the tax world has seen an acceleration in legislation that has significantly altered the playing field. From the Tax Cuts and Jobs Act in 2017 to COVID relief legislation (including the CARES Act) to the SECURE Act, SECURE 2.0 and the Inflation Reduction Act, the only thing certain in the tax rules is that they are uncertain.
“This has left financial planners encouraging clients to utilize tax-advantaged opportunities when they are available, since they may not be available for long,” said Brill.
Harnessing Market Volatility
With all the market volatility, Brill shares that now is a good time to update your personal financial statement and budget to ensure you’re still on track with your wealth plan. It may also be a good time to rebalance your portfolio and harvest any losses to offset some of your tax burden.
We spoke with Wyeth Greene, CFP ®, Private Wealth planner at Regions earlier this year to look at a few strategies to consider during volatile markets.
“There are strategies that you can deploy during market drops and rallies to provide a long-term benefit,” said Greene, who penned a thoughtful piece with tips on tax and estate planning during these roller coaster markets.
Among those strategies to consider for taxpayers currently in a lower tax bracket but expecting to be in the same or higher tax bracket in the future is converting a Traditional IRA or other qualified retirement assets to a Roth-qualified retirement account.
There are strategies that you can deploy during market drops and rallies to provide a long-term benefit. Wyeth Greene, CFP ®, Private Wealth planner
“This can help minimize taxes during one’s lifetime, while increasing the value of assets left to heirs,” noted Greene. “A Roth conversion can also offer several advantages in a volatile market, particularly when asset values are temporarily depressed.
Brill concurred and highlighted a few additional things to consider for those who may be looking at a higher tax bracket in the future, which she notes could come about should the Tax Cuts and Jobs Act expire as scheduled.
“In this case, it may make sense to accelerate recognition of income into the current year to take advantage of an offsetting deduction or credit that will not be available in future tax years,” Brill said, who covers these considerations in more detail in the 2023 Year-End Planning Guide.
Additional things to consider:
- Opting out of installment method of accelerating gain recognition.
- Electing out of deferred compensation plans.
- Exercising nonqualified stock options.
On the flip side, Brill noted additional tax deferment considerations for taxpayers currently in a high tax bracket who expect to be in the same or lower bracket in the future.
- Delay closing on capital gains transaction or structure to defer gains.
- Defer commissions and/or bonuses.
- Defer compensation.
- Contribute to a traditional qualified retirement account.
- Postpone retirement account distributions (except for required minimum distributions).
- Make qualified charitable contributions to satisfy required minimum distributions.
- Harvest tax losses to reduce capital gains.
- Bunch itemized deductible expenses in the same year in order to exceed the standard deductions.
No matter your current tax situation, year end is a great time to review your finances and consider your tax and estate planning needs to mitigate taxes, rebalance your portfolios and be mindful of capital gains distributions. Brill’s 2023 Year-End Planning Guide is a great resource with ideas to consider which may lead to further opportunity for the end of this year and beyond.
This information is general in nature, is provided for general marketing and educational purposes only, and should not be interpreted as accounting, financial planning, investment, legal or tax advice or relied on for any decisions you may make. Regions encourages you to consult a professional for advice applicable to our specific situation and consult irs.gov for current tax rules. Although based upon information from sources believed to be reliable and accurate, Regions makes no representation or warranties with respect to the information contained herein. Opinions of authors and contributors are their own and may not reflect the position of Regions, and Regions neither endorses nor guarantees any such advice, opinions, products or services. Regions neither endorses nor guarantees any websites or companies referenced this publication that are not owned by Regions.