2023 Year End Tax Moves You Must Be Doing

The end of the year can be a hectic time. You have the stress of the holidays, probably quite a bit of travel, plus a mix of revelry and fun… so it’s understandable that the last thing you’d want to think about is your finances.

But with the year coming to an end, there’s a huge difference between something happening on December 31st and something happening the very next day.

To recap, when you file your taxes next April, it covers everything from January 1st, 2023 through December 31st, 2023. If it happens on January 1st, 2024, that’s not something you’ll have to deal with until April 2025.

And given interest rates, getting a deduction earlier or getting income later can mean a big difference taxwise.

So, what are the things you need to do before the year ends?

This is not an exhaustive list. These are merely the highest leverage steps you can take.

1. Tax Loss Harvesting

The biggest financial step you can take for your taxes may be related to your investments.

When you make an investment, the value can go up or down. When the value goes up, you have unrealized gains. You only “realize” them when you sell. When you have capital gains, you’re taxed on those gains.

When the value goes down, you have unrealized losses. Again, you only realize them when you sell. When you have capital losses, you’re not taxed on those losses.

In fact, capital losses can offset capital gains. If you have $10,000 of gains and $10,000 of losses in a year, they’re offset and you owe taxes on $0. If you have more losses than gains, you can deduct $3,000 of those losses against your ordinary income. The remaining loss can be carried over to the next year.

It’s never fun to lose money but this is a situation where you can use those losses to reduce taxes you’d pay on existing gains.

There are some rules you have to follow, such as the wash rule, but this post on tax loss harvesting explains it all. If you have realized gains earlier in the year, it’s a good time to try to find some losses to offset them. While I wouldn’t let the taxes drive your decision making, this is a case where you can calculate the exact value of the move.

2. Accelerate Deductions

(this generally only applies if you itemize your deductions)

The basic rule in taxes is that you want to lower your reported income as much as possible. Your adjusted gross income is your income minus your deductions.

So, to reduce your adjusted gross income you have two levers:

• Push off income from this year to the next year, or,
• Accelerate your deductions to this year, from next year.

(This is also where some experts suggest you try to have your baby before the new year. 😂)

While that’s a ridiculous suggestion, it does illustrate this point – you want to try to get your expenses and deductions to occur in the current calendar year. A baby born on December 31st is a dependent for this year, while a baby born January 1st is not.

If you own a business, this means trying to pre-pay expenses so you can deduct them this year.

For personal matters, this means making contributions to tax deductible investment accounts like an IRA, HSA, or a 401(k). If you have children, or plan on having them or future educational needs, consider making a contribution to a 529 plan if your state offers good incentives to do so.

3. Donate Appreciated Stock to Charity

Donations are always a good idea and tax deductible when you itemize your deductions.

Donating appreciate stock, that you’ve held for more than a year, is especially tax friendly.

If you have been investing for a while, you are probably sitting on some appreciated stock in a taxable brokerage account. If you have a choice between donating cash or appreciated stock of the same amount, the stock is the better option.

When you donate appreciated stock, you get the market value of the stock and you don’t have to pay long term capital gains. If you wanted to donate $1,000 in stock, the charity gets $1,000 and you get a $1,000 deduction.

If you were to instead convert it to cash first, it would be worse financially.

You’d have to sell ~$1111 of appreciated stock, pay ~$111 in long term capital gains, to get $1,000 in cash to donate. You’ve basically just paid the U.S. Treasury for the privilege of donating $1,000 to the charity.

You can also just buy the stock again, so you can donate and “reset” your tax basis.

3a. Use a Donor Advised Fund

If you want to decouple the contribution from the donations, you can use a donor advised fund as an intermediary. In high income years (and high tax rate years), we’ve made larger contributions into a donor advised fund.

Then, as we want to make donations, we just do it through the fund. it can make life a little easier if you want to contribute a large sum of appreciated stock but you want the logistics to be a little easier.

4. Rebalance Your Portfolios

You should be rebalancing your portfolios at least once a year and if you haven’t done it recently, now is a good time to take a look at it.

Rebalancing your portfolios, and perhaps adjusting your asset allocation if you’ve had any major life changes, is important because you set that allocation for a reason.

If you use a simple three-fund portfolio, all three funds would have changed value from the start of the year.

If you wanted 80% equities and 20% bonds, they’re really out of whack.

Year to date, as of 12/19/2023, the S&P 500 is up nearly 25%.

Year to date, the Vanguard Total Bond Market Index Fund ETF (BND), is up less than 2%.

You are now 83% and 17% bonds. (but happy because your portfolio is up!)

Time to rebalance.

5. Review and Update Beneficiaries & Estate Plan

This one has no direct financial benefit but when was the last time you reviewed your beneficiary designation forms? Of all the “financial tasks” you’re supposed to do, this is the one I rarely touch because my beneficiaries have not changed. That said, it’s still good to look at it just in case!

This is also a good reminder to review and update anything related to your estate. I know we are woefully behind on this one (and maybe I put in this step for personal reasons) because the executor of our will passed away a few years ago. We’ve already asked someone else to fill that role but never updated our documents to reflect it.

Personally, this is also the time I review and update my internal set of financial documents – my Treasure Map (which includes the mapping of accounts as well as the Word document explaining everything). If I’m feeling especially bold, I try to see if there’s some way I can simplify my finances too.

And, when all else fails, you can just do this last minute move. And relax. 😴

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