7 Financial and Tax Planning Optimizations to Complete Before 2023

These are the seven areas of your financial picture that you need to consider optimizing before year end, particularly after yet another tumultuous year. Not only was the stock market fairly volatile, but there were also atypical tax regulation changes. The combination of those means that there is going to be a lot of complexity to account for as you look back on the year.

1. Tax-loss harvesting

Paying taxes on investment gains can be a financial burden, but tax loss harvesting can reduce your bill.

Tax loss harvesting involves selling losing investments to offset capital gains, thus limiting the taxes you owe. While it doesn’t always make sense to take a loss on investments, evaluate your portfolio and consider whether selling some poorly performing assets may make sense in your situation. You can claim as much capital loss as your realized capital gain plus $3,000. The maximum net capital loss you could deduct is $3,000 per tax year, anything above that would be deducted in the following year.

Did you have a liquidity event in 2022? If you did, there are more aggressive tax loss generating investments a financial adviser can introduce, such as customizable tax-loss portfolios. A financial or tax adviser can help you identify ways to capture that loss so you can offset gains from your liquidity event.

2. Max out your retirement contributions

Ensure that you are utilizing the tax-advantaged retirement accounts such as IRA and your company’s 401(k) to stack funds away for retirement and either pay tax now and let the fund grow tax-free or reduce your current year taxable income and pay tax later.

Note, you actually have until Tax Day of 2023 to make these contributions into IRAs but you should act ASAP to avoid forever forgoing the chance to make a 2022 contribution.

If you’ve already maxed out a 401(k) and IRA, you may also wish to explore investing in a health savings account (HSA) provided you have a qualifying high-deductible health plan. Contributions can be deducted from taxable income and withdrawals can be made tax-free from these accounts as long as funds are used for qualifying healthcare expenses.

If you have generated income outside of a W-2 job, you likely are able to create a SEP IRA which allows you to contribute outside of your 401(k) limitations. A financial advisor can help you identify and set that up.

3. Gifting to friends and family

While a gift tax is charged on those who make large gifts, you’re allowed to make gifts of up to $16,000 per recipient in 2022 without any federal gift tax being assessed. Gifting funds during your lifetime can reduce your taxable estate upon your death, so consider taking advantage of the opportunity to make a gift this year.

If you hold private company stock with a low cost basis, you may want to consider giving that now, either directly or via a trust, to avoid any potential gift taxes or material usage of your lifetime gift exemption, which is the amount you can gift in your lifetime without incurring federal gift taxes. The current lifetime gift tax exclusion is $12.06M (or $24.12 if you are married filing jointly). The exclusion may reduce back to pre-2017 levels of $5M after 2025.

One especially beneficial way to gift funds is to invest in a 529 account. These accounts can be used to pay qualifying educational expenses, including K-12 expenses and costs associated with college. Many states provide tax benefits for 529 contributions, and earnings from a 529 aren’t subject to federal tax when used to pay for eligible schooling-related costs.

Related article: Tax Strategy: Gifting Assets

4. Charitable giving

One option if you wish to remain eligible for a deduction for donations is to bundle contributions. This would mean that instead of making smaller contributions over several years, you could make one large donation in one year so the amount of the donation exceeds the standard deduction. As the end of the year approaches, consider whether this strategy may make sense and whether this is a year you’ll itemize.

Another option is donating long-term appreciated stock. Donating appreciated stock directly to a charitable organization means you avoid paying the capital gains tax. Additionally, you can claim the entire fair market value of the stock as a charitable donation instead of whatever’s left after paying the capital gains tax.

Related article: Tax Benefits of a Donor-Advised Fund

5. Estate planning

The end of the year is a common time to take stock of your long term estate planning. There are three buckets of estate planning to consider: the estate planning everyone should do, which includes will creation, the estate planning for those that want to preserve assets for beneficiaries, and estate planning for strategic tax planning. The end of the year is a good time to evaluate your estate plan and determine if it still meets your needs or if it needs to be adjusted or added to based on the three areas outlined.

An example of estate planning to preserve assets for beneficiaries to consider is utilizing a Grantor Retained Annuity Trust (GRAT). A GRAT can be beneficial if you want to transfer stock you think will appreciate significantly to someone else, e.g. kids. With a GRAT, your gift to the trust is valued when contributed, regardless of appreciation. You receive an “annuity” from the trust, e.g. a small % of initial amount each year for a series of years, and at the end the balance goes to the recipient.

An example of estate planning for strategic tax planning to consider is qualified small business stock stacking (or QSBS stacking). QSBS is a powerful tax provision for founders whereby, if certain criteria are met, up to $10M of appreciation in stock value is tax free in the U.S. at the federal level. However, it’s important to note that the $10M applies to each taxpayer that holds eligible stock. Therefore, QSBS stacking is where you gift portions of company stock to children and each individual . If gifted to a trust with its own tax ID, QSBS can be claimed for that trust as well, up to $10M at the federal level. However, it’s important to note that there is cost in setting up the trust and possibly in maintaining a trustee.

6. Work from home and remote work changes

Start collecting records of any temporary relocations (work from home/remote working). You may have temporarily stayed in a different state or city than usual, and that could affect your tax liability for the year. Careful records can help make sure that you have all the information and documentation you need for when you file.

7. Crypto Holdings

If you’ve made crypto investments this year, ensure you review your crypto transactions and have an accurate record of your activities. You should also ensure you are aware of when taxes may have been triggered. For example, if you send funds to a liquidity pool, your distributions while in the fund, are subject to taxation. You also want to be aware of any losses that can offset other gains.

For any FTX account holders, there are some specific considerations you should be thinking about. You will not be able to claim a theft loss deduction. Any capital gains and other income generated in the account will still be taxable. However, there may be an opportunity for FTT token holders to claim a capital loss due to being worthless. We recommend consulting with a tax advisor on your specific situation if you fall into this category.

The right financial advisory, tax, and trust & estate firms can work with you to identify all the right opportunities to maximize your finances. Now is the optimal time to get the best team in place to help you. We’ll set you up with complimentary conversations with each advisory firm in order to help you ultimately select the right one. Get started here.