Tips and Tactics for Maximizing Tax Savings in the Year Ahead

Taxpayers have plenty to consider as they review opportunities to limit tax liability and increase savings in 2023. Thanks to IRS inflation adjustments, tax savings opportunities are available through higher retirement savings limits and an increased estate and gift tax exemption. Rising interest rates and a higher standard deduction threshold could alter the way some taxpayers approach tax planning.

To help you create an effective tax strategy amid these changes, our tax and financial planning experts answer key questions about tax planning for the year ahead.

Q: What are some good ways to reduce my income tax liabilities?

Craig:  One positive from 2022’s high inflation environment is that the IRS indexes its adjustments to inflation. As a result, the IRS increased the standard deduction in 2023 to $27,700 if you’re married and filing jointly. That’s an $1,800 increase over 2022 and will benefit taxpayers who are not itemizing their deductions.

As for income tax guidance, we generally advise taxpayers look for ways to reduce their taxable income or postpone it to the next year, so they might keep the cash that goes to taxes in their pocket longer.

There are several ways you can reduce your income and the tax liability that comes with it. In your investment portfolio, you can harvest losses to offset your gains and potentially offset part of your ordinary income. The equity markets declined significantly in 2022, so your investment advisor can help you identify securities in your portfolio that have an unrealized loss. You can sell those to recognize the loss, using it to offset any capital gains in your portfolio. Bear in mind that, to abide by wash sale rules, you cannot buy back that security or any other substantially identical security within 30 days before or after you sold it at a loss. If you have capital losses in excess of your gains, you can use up to $3,000 of those losses to offset ordinary income. And, if you have more losses than you can use this year, you can carry them over to use against gains next year.

You also can reduce your income by making maximum deductible contributions to your eligible retirement accounts, such as an IRA and your 401(k), and by making charitable contributions. If you are older than 70 ½, have an IRA, and charitable intent, another technique is to do a QCD (qualified charitable distribution) where you give up to $100,000 directly from your IRA to charitable organizations and not have that amount count toward your income (or get a deduction).

If you can’t reduce your taxable income any further, think about ways to postpone the tax. That means taking whatever type of income event you can control and postponing it to next year. This can be done with capital gains, a bonus or a commission, or exercising stock options. By postponing those income events, you'll be able to push off paying the tax for another year.

Q: What are the new retirement account contribution limits?

Bryan: There is good news in 2023 for retirement savers. IRS limits for tax-deferred retirement accounts are indexed to inflation. As a result, they increased. This provides a chance to build your retirement savings by increasing annual contributions to your IRA or company-sponsored retirement account.

In 2023 you can contribute about $2,000 more annually to 401(k), 403(b) and 457 plans, or up to $22,500. If you are age 50 or older, you can add $7,500 more per year, or a total of $30,000.

Annual contribution limits to traditional IRAs and Roth IRAs increase $500 per year in 2023, to a total of $6,500 annually. The additional “catch-up” contribution for those age 50 or older stays the same at $1,000 per year.

Q: How can I use charitable contributions to reduce my tax liability?

Craig: Contributions to a qualified charity qualify as a tax deduction, which reduces your taxable income by the amount you donate. There are a range of charities or philanthropic organizations that qualify, but generally any 501(c)(3) entity is eligible.

Often, clients will tell us that they want to make a charitable contribution but aren’t ready to decide which organization should receive it. In those cases, one option is to open a donor advised fund. The way it is structured, you can make the contribution to your donor advised fund now and take the deduction in this tax year, yet you don't have to decide who will receive the funds until later. Donor advised funds have low initial funding requirements and no annual distribution requirements, so they are easy to set up and maintain.

If your taxable income is near the standard deduction threshold, you might consider bundling two years of charitable contributions into one year. For example, the standard deduction in 2022 is $25,900 (if you are married). In 2023 it increases $27,700. You could “bundle” two years’ worth of charitable deductions in a donor advised fund for the 2022 tax year to move past the standard deduction threshold and itemize more deductions in 2022. Then in 2023, take the higher standard deduction. By doing this, you maximize the way that charitable contributions can reduce your taxable income in both years.

Q: How much can I transfer to my beneficiaries free of gift or estate tax?

Bryan: There is an increase in 2023 to the estate and gift tax exemption amount. That’s the amount that you can transfer at your death or during your lifetime without having to pay any federal estate or gift tax. For anything above the exemption amount, there is a 40% federal tax, so this is an important number for anyone with a large estate.

For 2023 that exemption amount increases to $12.92 million (or $25.84 million if you are married). This is up from $12.06 million (or $24.12 million if you are married) in 2022. That $860,000 increase gives you a big new window to gift assets out of your estate, even if you have already used the previous balance of your exemption.

Keep in mind the exemption amounts are scheduled to be cut in half at the end of 2025 with the expiration of the Tax Cuts and Jobs Act. If you don’t use your exemption before 2026, you are scheduled to lose half the benefit. That’s likely to calculate to about $3 million of additional tax for those with larger estates.

Q: What is the annual exclusion for gift tax, and how much can I give tax free?

Bryan: The annual exclusion is an additional amount you can gift each year free of tax. It also doesn’t use any of your estate and gift tax exemption. In 2023, you can gift up to $17,000 per person, or $34,000 as a married couple. That amount can go to as many people as you want without paying tax, using your exemption amount, or needing to file a gift tax return. That’s an increase of $1,000 per person over 2022.

People often think there is a penalty if you go over the annual exclusion amount. That's not true. The only issue is that you are required to file a gift tax return. So long as you have sufficient lifetime exemption left, you will owe no tax.

Q: What wealth transfer strategies work well in a higher interest rate environment?

Bryan: When rates are higher, two strategies that become more attractive are CRTs (charitable remainder trusts) and QPRTs (qualified personal residence trusts). With a CRT, you make a gift to a trust and retain an annuity from the trust for your lifetime or a period of years. Then, at the end of that time, the balance of the trust goes to charity. CRTs work well when you have an appreciated asset that you plan to sell. The trust can sell the asset tax-free and defer the tax over the period of your annuity.

With a QPRT, you contribute a residence to the trust but retain the right to live in the property for a period of years. At the end the period, the house goes to your named beneficiaries. QPRTs work well with vacation homes or other properties you would like to pass to the next generation. With both CRTs and QPRTs, the calculations of the value of your retained interests and the remainder interests going to charity or family members become more favorable with high interest rates.