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December 8, 2022

Year-End Tax Planning Tips: Consider Estate and Gift Tax Exclusions, Roth IRA Conversions and More

The end of the year is an opportunity to get your affairs in order for the year ahead, and when it comes to tax planning, the sooner you begin preparations the better. To optimize tax savings in the new year and to minimize tax burdens, take a moment at the end of the year to review these tips to ensure you’re making the most of the year-end tax planning season.  

As 2023 approaches, there are actions that can be taken now to offset or minimize your tax burden. Anders monitors legislation, both enacted and proposed, so that we can best advise you and your business on how to move forward in an ever-changing landscape.  

Take Advantage of Estate and Gift Tax Exclusion Expansions 

In 2022, the annual gift tax exclusion allowed individuals to gift $16,000 per recipient and married couples to gift-split up to $32,000 to a beneficiary. The exclusion will rise to $17,000 per individual and $34,000 per married couple in 2023.  

The IRS has clarified that those who took advantage of the increased gift tax exclusion between 2018 and 2025 “will not be adversely impacted after 2025 when the exclusion amount is scheduled to drop to pre-2018 levels.” The 2022 lifetime estate exemption amount of $12,060,000 will rise to $12,920,000 in 2023. This allows individuals an additional $860,000 to gift that will likewise not be adversely impacted once the exclusion returns to pre-2018 levels.  

Maximize Charitable Contributions 

The end of the year is the perfect time to finalize charitable contributions, particularly if this area was neglected or forgotten about during earlier points of the year. In addition to traditional donations to charity, there are other ways to make a difference in a community that could use assistance while still making tax-conscious decisions. 

Consider a Donor-Advised Fund 

Donor-advised funds allow charitable contributions, while still allowing the donor advisory privileges regarding the distribution of funds and the investment of assets within the account. A donor-advised fund is an account comprised of contributions made by multiple individual donors that is maintained and operated by an eligible 501(c)(3) sponsoring organization.  

Be aware that the IRS closely monitors these arrangements. If an organization abuses the system to generate questionable charitable deductions and provide impermissible economic benefits to donors and their families, payments made to the fund could no longer be deducted as a charitable contribution under Internal Revenue Code section 170. Donors or managers of donor-advised funds could also face additional excise taxes and the charity’s 501(c) (3) exemption could be revoked. The IRS does provide guidance for potential donors to ensure they are compliant with new requirements.  

Maximize 529 Contributions 

The Tax Cuts and Jobs Act (TCJA) of 2017 expanded 529 savings plan eligibility to include public, private and religious education costs for kindergarten through 12th grade. While each state has their own sponsored plan and rules regarding the program, Missouri’s MOST 529 Program allows contributors to invest up to $550,000 per beneficiary, but only $8,000 can be deducted from an individual’s taxes per year ($16,000 for married filing joint). Plans with beneficiaries enrolled in an elementary or secondary school are limited to an aggregate of $10,000 in Missouri. For more information on 529 college saving plans, refer to our previous posts on the topic. 

Reevaluate Payroll Deductions and Other Benefits 

Make any necessary adjustments to your pre-tax benefits before your last paycheck of the year. Examine your contributions to your retirement fund: was it enough to maximize your company’s matching policy? Those over 50 are also eligible for an additional $6,000 catch-up contribution. Take this time to maximize your health savings account as well. If you are 55 or older, you’re eligible for an additional $1,000 catch-up contribution.   

Consider a Roth IRA Conversion 

If you are currently contributing to a traditional IRA retirement account, consider converting these funds to a Roth IRA. While Roth accounts require an upfront tax payment, the money inside the account can grow tax free, setting you up for a windfall when it comes time to withdraw. Should you find yourself in a position where you expect to move up into a new tax bracket soon, converting to a Roth account now could save you from a larger tax burden at a later date.  

Manage Flexible Savings Account Funds 

Reducing your potential tax burden wherever possible is just as important as finding favorable deductions. One easily missed area that could surprise you come tax season are Flexible Savings Account excess funds. Make sure to use the final months of the year to spend as much from the account as possible to avoid a potential 20% tax on the remaining funds.  

Consider Tax-Loss Harvesting  

If you’ve sold securities this year at a net loss, those losses can help offset capital gains taxes from more successful investment sales. With tax-loss harvesting, an investment that has an unrealized loss is sold, which allows a credit against any realized gains for the same portfolio.  

Qualified Business Income (QBI) Optimization 

Also known as the “20% Business Deduction,” QBI is a large tax planning strategy. To optimize the QBI deduction, careful considerations need to take place to determine year-end bonuses or if considering accelerating or deferring income/expenses. 

Anders Tax advisors are dedicated to providing the best possible guidance for our clients through educating ourselves around upcoming and proposed legislative changes. Contact an Anders advisor below to further discuss your tax planning options. 

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