Wrapping Up: A Guide To Year-End Planning

You Can Be A Valuable Tax Planning Resource For Your Clients

The end of the year is approaching fast – and it’s been one for the books. Since there’s a lot to consider, we’ve created a guide to assist you with year-end planning. Review the items below with your clients – and send them into 2024 on the right foot.

Retirement Contributions

Be sure to maximize the following:

Send your clients into 2024 on the right foot

Workplace accounts. Encourage clients to take full advantage of any employer match benefit. For 2023, the maximum employee deferral for 401(k), 403(b) and 457 accounts is $22,500, and individuals ages 50 and older can defer an additional catch-up contribution of $7,500. For SIMPLE IRAs, the deferral is now $15,500, and the catch-up contribution is $3,500.

Traditional IRAs. Maximizing contributions to traditional IRAs is another option. For 2023, the contribution limit is $6,500 – or 100% of earned income, whichever is less – plus a $1,000 catch-up contribution for clients ages 50 and older. Modified adjusted gross income (MAGI) limits for contributions to traditional and Roth IRAs also increased in 2023.

Contributions To FSAs And HSAs

If allowed under an employer’s plan, an individual can carry over unused health flexible spending account (FSA) amounts, up to a maximum of $610, in the employer’s plan year. Additionally, clients with dependent-care FSAs can save as much as $5,000 per family or $2,500 for individuals who are married but filing separately in 2023.

Also consider maximum health savings account (HSA) contributions for clients who have high-deductible health plans (HDHPs). In general, for 2023, the maximum contribution for an individual HSA is $3,850, and the maximum for a family HSA is $7,750. Plus, clients ages 55 and older can contribute an additional $1,000.

Tax Implications

Clients on the threshold of a higher tax bracket may be able to put themselves in the lower one by deferring some income to 2024. Here are some 2023 thresholds to keep in mind:

Thirty-seven percent marginal tax rate: Taxable incomes exceeding $578,125 (individual), $693,750 (married filing jointly), $578,100 (head of household), and $346,875 (married filing separately).

Twenty percent capital gains tax rate: Taxable incomes exceeding $492,300 (individual), $553,850 (married filing jointly), $523,050 (head of household), and $276,900 (married filing separately).

Additional Medicare tax: For clients with W-2 or self-employed income above certain MAGI thresholds, total Medicare taxes will be 2.35% and 3.8%, respectively.

Three-point-eight percent surtax on investment income: The lesser of net investment income or the excess of MAGI greater than $200,000 (individual), $250,000 (married filing jointly), $200,000 (head of household) and $125,000 (married filing separately).

Gains And Losses

During year-end planning, review your clients’ capital gains and losses and assess whether it’s time to rebalance client portfolios. This process may reveal tax-planning opportunities.

Charitable Donations

Encourage clients to consider ways to give back, such as:

Charitable contributions donated directly to a qualified charity or donor-advised fund (DAF): May be eligible for a federal tax deduction. (This strategy is only beneficial if clients itemize deductions.)

Deductions on DAF contributions: Capped at 60% of adjusted gross income (AGI) for cash and 30% of AGI for long-term appreciated securities.

Qualified charitable distributions (QCDs): Clients ages 70½ and older can make a QCD of up to $100,000 directly to a charity, and married joint filers may exclude up to $100,000 donated from each spouse’s IRA. A QCD can reduce taxable income while satisfying the RMD requirement. QCDs to “split-interest entities” have a lifetime limit of $50,000.

Stock Options

Alternative minimum tax (AMT) exemption limits increased in 2023 to $81,300 for single tax filers and $126,500 for married joint filers. Depending on AMT projections, clients may want to wait until January 2024 to exercise incentive stock options.

Estimated Taxes And RMDs

Estimated taxes: Clients who may be subject to an estimated tax penalty can request that employers adjust their withholding to cover shortfalls (via Form W-4). They could also explore using Form 1040-ES to make estimated quarterly payments for income that isn’t subject to withholding.

RMDs: A retiree’s first RMD must be completed by April 1 of the year after they turn 73 (up from 72 in 2022). Clients who turn 72 in 2023 don’t have to take an RMD for the year. After the first year of RMDs, clients must satisfy their annual RMD distribution by Dec. 31 for each ensuing year. Taxpayers who choose to delay the first RMD until April 1 will need to take another RMD before year-end.

Student Loans

On Sept. 1, 2023, federal student loans resumed accruing interest, with payments restarting as of Oct. 2023. Payments are subject to a 12-month “on-ramp transition period,” which ends on Sept. 30, 2024.

President Biden has launched the Saving on a Valuable Education (SAVE) plan, an income-driven student loan repayment program that features expanded forgiveness provisions.

Estate Plans

For some clients, establishing a defective grantor trust, spousal lifetime access trust or irrevocable life insurance trust may be an effective strategy to reduce estate tax exposure.

If the Tax Cuts and Jobs Act expires at the end of 2025 as planned, it will cut the federal estate tax exemption by approximately 50% and greatly expand the number of clients with actual or potential federal estate tax concerns. To avoid losing the current exemption, clients may need to act before Dec. 31, 2025.

Guide The Way

As you approach year-end planning with clients, use these topics to discuss what’s most important to them. And be sure to collaborate with their CPAs, attorneys and other professionals to begin laying the groundwork for more complicated issues. In addition to helping your clients, you’ll show your value as a trusted resource.

Finally, if your clients have more complex scenarios to work through, Commonwealth can help. We offer a wealth of experience that can make the difference for your clients and your practice.

Commonwealth Financial Network® does not provide legal or tax advice. You should consult a legal or tax professional regarding your individual situation.

This post originally appeared on “Insights,” a blog authored by subject-matter experts at Commonwealth Financial Network®, Member FINRA/SIPC, a Registered Investment Adviser.

Mike Simolo is an Advanced Planning Consultant at Commonwealth Financial Network.

This article is part of WSR’s Sponsor Partner Content series.

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