6 Tax Savings Strategies for 2023 Year-End


Before 2023 ends, taxpayers still have time to consider tax savings opportunities that can potentially preserve significant sums of money while achieving long-term financial goals more effectively. The following explores strategies available to individuals to optimize their financial situations before the end of the year. 

1. Bunching Tax Savings Strategies Using Donor Advised Funds

The Tax Cuts and Jobs Act (TCJA) was signed into law in December 2017. While the charitable deduction remained intact, the standard deduction doubled, and many popular itemized deductions were eliminated. Because of this, most taxpayers will take the higher standard deduction instead of itemizing. In 2023, the standard deduction for a Married Filing Jointly status is $27,700 and $13,850 for Single Filing status.

Consider this example. John and Mary, who file their taxes as Married Filing Jointly, donate $20,000 each year to qualified charities. In the past, this $20,000 donation exceeded the itemized deduction threshold, so they could deduct this amount from their income as a charitable tax deduction. Under the tax reform law, the $20,000 donation no longer surpasses the standard deduction. However, if they “bunch” two years of donations into one year, they can itemize every other year and receive the full tax benefit of their charitable giving.

A Donor Advised Fund is an ideal vehicle to support this tax savings strategy. John and Mary can contribute $40,000 to a Donor Advised Fund and deduct the full amount in the year it’s contributed based on charitable deduction limits. John and Mary can then decide when and how much to give to charities at any time down the road as long as they are IRS qualified public charities.

2. Harvesting Investment Gains and Losses

Imagine you’re reviewing your portfolio and see that your tech holdings have risen sharply while some of your industrial stocks have dropped in value. As a result, you now have too much of your portfolio’s value exposed to the tech sector. To realign your investments with your preferred allocation, you sell some tech stocks and use those funds to rebalance. In the process, you end up recognizing a significant taxable gain.

This is where tax-loss harvesting comes in. If you also sell the industrial stocks that have declined in value, you could use those losses to offset the capital gains from selling the tech stocks, thereby reducing your tax liability.

In addition, if your losses are larger than the gains, you can use the remaining losses to offset up to $3,000 of your ordinary taxable income (or $1,500 each for married taxpayers filing separately). Any amount over $3,000 can be carried forward to future tax years to offset income down the road.

3. Qualified Charitable Distributions (QCD)

Understanding qualified charitable distributions begins with understanding required minimum distributions. People who hold Individual Retirement Accounts (IRAs) are required to take RMDs each year beginning at age 73 or 75—even if they don’t need or want the funds. That same required minimum distribution increases the IRA holder’s total taxable income, which could potentially push the taxpayer into a higher income tax bracket.

QCDs enable individuals who are 70 ½ or older to fulfill their required minimum distribution by a direct transfer of up to $100,000 to charity. They can also be used to support multiple charities, if the sum of the distributions is within the $100,000 limit. Since QCDs are not required to be reported as taxable income, both higher tax rates and phaseouts can be avoided. QCDs can also reduce the balance of the IRA, which will reduce required minimum distributions in future years.

It’s important to know that QCDs must be made directly to the eligible charity from a traditional IRA, inherited IRA, inactive Simplified Employee Pension (SEP) plan, and inactive Savings Incentive Match Plan for Employees (SIMPLE) IRAs.

4. Net Unrealized Appreciation (NUA)

For 401(k) or employee stock ownership plan (ESOP) participants with highly appreciated company stock, the NUA strategy can potentially produce significant tax savings. The net unrealized appreciation (NUA) is the difference in value between the average cost basis of the shares of employer stock and the current market value of the shares.

Distributions from a 401(k) or ESOP are treated as ordinary income at the time of distribution.  Ordinary income is taxed at a higher rate than long-term capital gains. The IRS offers an election for the net unrealized appreciation of employer stock to be taxed at the more favorable long-term capital gains rate.

The NUA strategy requires the participant to take a lump-sum distribution of all the assets in the 401(k) or ESOP account. The employer stock is distributed in-kind into a taxable account, and the rest of the assets can be rolled over into an IRA. Shares of the employer stock will only be taxed as ordinary income on the cost basis. The net unrealized appreciation on the company stock will not be taxed as ordinary income. As the company stock is sold, the net unrealized appreciation will be subject to the long-term capital gains tax rate, which may be lower than the participants current income tax rate.

Since this strategy requires the participant’s 401(k) or ESOP be distributed in its entirety within one calendar year, individuals planning to use this strategy in 2023 must start the process early enough to ensure the lump sum distribution occurs by December 31.

5. Maximizing Tax Savings Vehicles

Reduce taxable income by maximizing pre-tax salary deferrals to employer sponsored retirement plans. The following is the 2023 maximum employee contribution amounts to employer plans:

  • $22,500 for 401(k) plans, 403(b) plans, and 457(b) plans
    • $7,500 Annual catch-up contributions (age 50+)
  • $15,500 SIMPLE 401(k) and SIMPLE IRA plans
    • $3,500 Annual catch-up contributions (age 50+)

Maximize contributions to an IRA (MAGI may limit the Traditional IRA deductible amount for individuals covered by an employer sponsored retirement plan). The following is the 2023 maximum contribution amount for IRAs:

  • $6,500 Traditional and Roth IRAs (combined)
  • $1,000 Annual catch-up contributions (age 50+)

Maximize contributions to a Health Savings Account (HAS). The following is the 2023 maximum contribution amount for HSAs:

  • $3,850 Individual coverage
  • $7,750 Family coverage
  • $1,000 Annual catch-up contributions (age 50+)

6. Roth Conversions

With federal income tax brackets and rates remaining historically low, converting traditional retirement accounts to Roth IRA accounts may make sense. The following is an outline of how Roth conversions work:

  • Contributions to a Traditional IRA can be pre-tax, after-tax, or both.
  • When making a Roth conversion, only the appreciation on the amount converted is subject to ordinary income tax in the year of the conversion.
  • The after-tax contribution on a Roth conversion will not be subject to ordinary income tax.
  • Keep in mind that if you own more than one Traditional IRA (Inherited IRAs are excluded), the IRS will regard these accounts as one entity and will prorate the cost basis on the conversion amount.
  • It is ideal to pay the taxes on the conversion from a taxable account, so it’s important to have enough funds set aside to pay the taxes before completing the conversion.
  • The amount converted into a Roth IRA will grow tax-free and the distributions will also be tax-free and penalty free if taken after 5 years and age 59 ½ (there are exceptions for early-withdrawal penalties).
  • There are no required minimum distributions with Roth IRAs.

It is important to not wait too long to make the conversion because some IRA custodians will not process conversions for the year after a specific date.

Implementing tax-savings strategies is a complex process. Schedule a meeting with your MAI Wealth Advisor to discuss the best strategies that will benefit you.

Information as of Tuesday, October 17, 2023.

The opinions and analyses expressed herein are subject to change at any time. Any suggestions contained herein are general, and do not consider an individual’s or entity’s specific circumstances or applicable governing law, which may vary from jurisdiction to jurisdiction and be subject to change. Distribution hereof does not constitute legal, tax, accounting, investment, or other professional advice. Recipients should consult their professional advisors prior to acting on the information set forth herein. In accordance with certain Treasury Regulations, we inform you that any federal tax conclusions set forth in this communication, were not intended or written to be used, and cannot be used by any taxpayer, for the purposes of avoiding penalties that may be imposed by the Internal Revenue Service.

We look forward to learning about your financial goals.