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Smart Year-End Tax Planning - December 2023

Itís Time To Review Your Taxes Ė and 
Lower Your Tax Bill Before it's Too Late!

Year-end tax planning always makes good sense, and this year it's especially important. It's unfortunate that so many taxpayers forget about their taxes until April 15th. A little planning at the end of the year can go a long way toward reducing your tax bill. 

As year-end approaches you should take some time to think about your tax situation. Look closely at how much you are earning, spending, and how that effects your tax situation.

Year-end tax planning is about timing. Conventional wisdom holds that taxpayers should accelerate deductions into the current year while deferring income into the next year. The premise here is that a dollar saved today is worth more than a dollar saved tomorrow, so lowering this year's taxes is better than lowering next year's taxes.

Conventional Tax Planning Tips
Unless you believe that next year you will be in a higher personal income tax bracket, you may want to defer income until after the first of the year. If you believe that your tax bracket will be higher this year than next, you may want to accelerate deductions. Bottom line: review your taxes before it's too late.

Here are some tax planning strategies to consider implementing before year-end to keep your income tax bill as low as possible. Chances are at least some of them will apply to you.

Alimony Payments
Starting in 2019, alimony was no longer deductible by the payor spouse and includible in income by the recipient spouse. This rule only applies for divorce or separation instruments executed after December 31, 2018, and instruments executed on or before December 31, 2018, but modified after that date to include these new provisions. 

Bunch Your Itemized Deductions
If your total itemized deductions are close to the standard deduction amount each tax year, consider bunching together expenses for itemized deductions every other year. Itemize in those years to deduct more than the standard deduction amount. Then claim the standard deduction in the other years. Over time, this technique can save thousands of dollars in taxes by significantly increasing your cumulative write-offs.

For 2023, the standard deduction is $27,700 for taxpayers Married Filing Jointly and $13,850 for Single or Married Filing Separately taxpayers. The standard deduction is $20,800 for Heads of Households.

Business Expenses
Under the cash method of accounting you claim income and deduct expenses in the year they are received or paid. Under the accrual method of accounting you claim income and deduct expenses in the year they accrue. The discussion immediately below pertains to cash method of accounting business owners.

You might consider invoicing customers in late December or January so you donít have to include that income on this year's tax return. Keep in mind that it may only make sense to defer income if you think you will be in the same or a lower tax bracket next year. For every dollar of income deferred until January you will not owe taxes on that income until April of the year after next.

Now may be the time to stock-up. Purchase items your business will require in the immediate future to maximize deductions for this year. You can accelerate your expenses for this year by buying office supplies and any other tax deductible items before December 31st. And be sure to save your receipts for tax time!

Pay your bills for telephone, cell phone, subscriptions, rent, insurance, and utilities early to take the deduction this year.

If you will be buying new office equipment in the near future, consider purchasing it now. Your equipment will have to be in your office, "placed in service" by year-end.

Charitable Contributions
You can deduct donated household goods, clothing, and other items so long as they are in good or better condition. You will need a written receipt for all charitable donations. You can also deduct the cost of driving for charity at
14 cents per mile. However, you cannot take a charitable deduction for the value of your time when volunteering.

Delay Mutual Fund Purchases
The later it gets in the year, the more likely you'll receive the year-end capital gain distributions on any mutual fund you didnít even own except for a short time during the year. If you buy shares just before the ex-dividend date, you'll get back part of the money you just invested and owe taxes on it. Check the mutual funds distribution schedule (ex-dividend date) and if it's late in the year, wait until after that date to buy into the fund.

Flexible Spending Accounts
If you have a Flexible Spending Account you have set aside tax-free earnings to cover medical and dental expenses through a plan offered by your employer. You should use up any funds in your Flexible Spending Account. If you donít, you risk losing that money forever, unless your employer amended the plan to allow unused funds to be utilized within 2 1/2 months after year end, or your employer amended the plan to allow you to carryover up to $500 in unused expenses. Make doctor appointments now, and buy necessary medical supplies that are covered in the plan Ė such as eyeglasses and medications.

Give Appreciated Stock to Charity Ė Sell the Losers
You have some appreciated stock that youíve owned for over a year. Consider donating the shares to charity. You generally can claim an itemized charitable contribution deduction for the full market value of the stock at the time of the donation - and youíll avoid any capital gains tax. On the other hand, donít donate stocks with a loss. Sell them, take the capital loss, and give away the cash proceeds. That way, youíll write off the full amount of the cash donation while keeping the tax-saving capital loss for yourself .

Make an Extra Mortgage Payment
Make one additional mortgage payment on or before December 31st so you can deduct the additional interest paid. Make sure that the additional interest payment is included on you Form 1098-Mortgage Interest Statement that you receive from your lender next month. If not, you may need to add the interest amount to the amount reported by your lender, and attach an explanation to your tax return.

Beginning in 2018, taxpayers may only deduct interest on $750,000 of qualified residence loans. The limit is $375,000 for a married taxpayer filing a separate return. The $1 million debt limit still applies if a taxpayer has entered into a binding written contract before December 15, 2017, to close on the purchase of a principal residence before January 1, 2018, and actually closes before April 1, 2018. The $1 million debt limit also continues to apply for acquisition debt incurred before December 15, 2017, that is refinanced on or after December 15, 2017. Interest on home equity debt is no longer deductible. The limits apply to the combined amount of loans used to buy, build or substantially improve the taxpayerís main home and second home.

Prepay Medical Expenses
Medical expenses are one of the least useful tax deductions because you must spend more than 7.5%
of your adjusted gross income to claim any tax deduction. Pay doctor bills, insurance premiums, buy eyeglasses, and stock up on prescription drugs now.  

Prepay Property Taxes
If you're not affected by the Alternative Minimum Tax, and you don't think your personal income tax bracket will be higher next year, you might want to pay your property taxes and take the deduction now. If you prepay next year's property taxes before January 1st, you can deduct that amount on this years income tax return.

However, donít do this if you know youíll owe the Alternative Minimum Tax. Write-offs for state and local income and property taxes are completely disallowed under the Alternative Minimum Tax rules.

Keep in mind that the itemized deduction for state and local taxes on Schedule A is now limited to $10,000 through 2025.

Retirement Plans
Contributions to a retirement plan reduce your taxable income. Review your retirement plan options and decide on setting up a retirement plan. Many retirement plans need to be established by December 31st to make tax-deductible contributions for this year.

Remember that ordinarily you can contribute an entire year's retirement plan contribution each year, even if you started a new job in the last quarter of the year. Some taxpayers who begin a new job in the last quarter arrange to have their entire paycheck go into the plan - which eliminates their taxable income.

Stock Investments
Even though the stock market has gone up substantially since the lows of March 2009, many investors still have long-term capital losses on investments theyíve held longer than one year. If you have capital gains you can take losses to offset some of the capital gain income by selling losing investments. This will offset any capital gains you made this year. Losses offset gains dollar for dollar, and losses in excess of your gains can be deducted, up to $3,000 per year against ordinary income. The excess losses are carried forward to future years - but they are forfeited upon death. Alternatively, if you already have capital losses, you may want to take some gains if you do not need the capital loss deduction this year.

This yearís top capital gains tax rate is 20%, for those in the highest bracket. It's 23.8% when including the 3.8% Affordable Care Act Medicare Surtax for those in the highest bracket. If your income tax bracket is in the middle, then the current tax rate for your long-term capital gains is 15%. If you are in the lowest bracket, then the current tax rate for your long-term capital gains is 0% percent. In that case you are best just claiming the capital gain as it is tax free.

What if you have both gains and losses in your stock portfolio? Which ones should you sell? First, sell the long-term winners - stock held for over 12 months. Youíll benefit from the low maximum long-term capital gains rate.

Which stocks should you sell to offset those gains? You will get the most tax savings with a short-term loss because short-term losses first go to offset short-term gains that would otherwise be taxed at your regular income tax rate, which can be as high as 37%, and then to offset long-term 20% gains.

You can further reduce taxes by telling your broker to sell your highest-cost basis shares first. Using this method requires you to identify the shares to be sold by specifying their cost and purchase dates. You must also receive a written confirmation of your instructions from the broker or keep a record of your oral instructions in your tax file.

If you don't follow this procedure, you must use the first-in, first-out (FIFO) method, meaning the shares you bought first are considered sold first. Those are the shares most likely to have the largest capital gains Ė and tax hit.

Worthless Securities
Stocks and bonds that became completely worthless during the tax year are treated as though they were sold for zero dollars on the last day of the tax year. This affects whether your capital loss is long-term or short-term Ė although most securities do not become worthless in the year they are purchased or otherwise acquired - so losses from worthless securities are almost always long-term losses.

Worthless means of absolutely no value. Just because a company is not doing very well financially, itís shares decline in price, itís shares were de-listed by the stock exchange or NASDAQ, or the company filed for bankruptcy protection, does not necessarily mean that the securities are worthless. Be prepared to prove to the IRS that the securities are completely worthless.

If the security isnít completely worthless, but you desire to take a capital loss, then you should sell the securities for whatever you can get no later than the last day of this year. Thatís where year-end tax planning comes in.

Wash Sales
Be careful to avoid a "wash sale". If you buy the same security within 30 days before or after you sell the original shares the tax rules disallow the loss.

The American Opportunity Credit is a tax credit of up to $2,500 for paying tuition and other education expenses. This credit is available for this year.

Organize Your Financial Records
Good record-keeping pays off at tax time. It makes your tax return preparation easier and faster, and we might uncover additional tax deductions. Remember, the IRS requires receipts and other records.

These year-end tax planning tips will apply differently to each taxpayer. Changes to your adjusted gross income from one year to the next can have a negative impact under certain circumstances. For instance, postponing an IRA distribution will reduce your current taxable income which is good, but it will increase your next year's income, which may be bad. Higher income next year can increase the taxable amount of your Social Security benefits; reduce or eliminate your ability to make deductible IRA contributions; and reduce or eliminate your deductions for medical expenses, casualty losses, charitable contributions and rental real estate. Higher income could also reduce or eliminate the tax credits for dependent children and college education expenses, Roth IRA contributions, conversions of regular IRAs into Roth IRAs and college education loan interest deductions. Weíll need to consider the effects of potential year-end tax breaks for both this year and next, and implement only those ideas that will put you ahead over the two-year period. Take the time to review the best strategy with us now and make the most of your year-end tax planning.


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