End-of-year financial and tax considerations

As the year draws to a close, practitioners have an opportunity to reach out to clients and discuss possible financial steps. The following highlights some of the more important year-end considerations.

Inflation Reduction Act credits, deductions, and rebates

As a result of the Inflation Reduction Act of 2022, P.L. 117-169, a substantial number of new credits, deductions, and rebates are available for making homes and commercial buildings more energy-efficient and for purchasing electric and hybrid vehicles. While these incentives are generally available next year too, using them in 2023 may be more beneficial for a client, to the extent there’s time left this year to do so. For details about these tax incentives, see the IRS webpage “Credits and Deductions Under the Inflation Reduction Act of 2022.”

Retirement plan contributions

Contributions to retirement plans are an excellent way to reduce taxes while building a retirement nest egg, and clients should be urged to contribute the maximum allowable. For 2023, some relevant contribution limits are as follows:

• Maximum 401(k) plan elective deferral: $22,500 (plus $7,500 catch-up for age 50+).
• Individual retirement arrangement (IRA) contribution limit: $6,500 (plus $1,000 catch-up for age 50+).
• IRA deduction phaseout for active participant in a workplace retirement plan: Modified adjusted gross income (MAGI) from $116,000 to $136,000 (married filing jointly); $73,000 to $83,000 (single taxpayers and heads of household); $0 to $10,000 (married filing separately); $218,000 to $228,000 (individual who is not an active participant in a workplace retirement plan whose spouse is an active participant in a workplace retirement plan).
• Roth IRA contribution limit: $6,500 (plus $1,000 catch-up for age 50+).
• Roth IRA contribution limit phaseout: MAGI from $218,000 to $228,000 (married filing jointly); $138,000 to $153,000 (single and heads of household); $0 to $10,000 (married filing separately).
• SIMPLE IRA plan contribution limit: $15,500 (plus $3,500 for age 50+).
• SEP IRA contribution limit: $66,000.
• Solo 401(k) contribution limit: $66,000 (plus $7,500 for age 50+).

Clients also may wish to consider a Roth conversion, especially if there’s room to make it without pushing themselves into a higher tax bracket for the year.

Required minimum distributions (RMDs) and charitable contributions

For clients who must take an RMD from an IRA (and others who wish to donate), there may be a tax advantage to making charitable contributions directly from the IRA rather than writing a check. Such a donation, up to $100,000 in 2023, is a “qualified charitable distribution” and besides satisfying the annual RMD requirement, it is excluded from gross income rather than being treated as an itemized deduction. Thus, it reduces the taxpayer’s adjusted gross income (AGI), which is used in calculating other tax items, such as the medical expense deduction (limited to expenses that exceed 7.5% of AGI), the amount of Social Security benefits subject to tax, and the 3.8% net investment income tax.

Donating appreciated assets

Clients can maximize contributions to a charity by donating appreciated assets — rather than first selling those assets, paying the tax on the gain, and donating the after-tax amount. This method eliminates the capital gains tax that would otherwise be paid and gives the taxpayer a deduction for the fair market value of the gift. It should be noted that not all charities can or want to accept such gifts, but donor-advised funds typically have the resources to process those types of gifts.

Health care costs

Health care costs constitute a large chunk of many individuals’ budgets. If a client is covered by a high-deductible health plan, there are several advantages to setting up a health savings account (HSA). Those advantages include a tax deduction (limited to $3,850 for self-only coverage and $7,750 for family coverage in 2023; $4,150 and $8,300 for 2024; plus a $1,000 catch-up contribution for age 55+) for the contributions even if the client does not itemize deductions, the potential exclusion from income of contributions made to the HSA by an employer, and tax-free distributions where the funds are used to pay qualified medical expenses.

Alternatively, if a client’s employer offers a health flexible spending arrangement (FSA), making use of such a plan will allow the employee to pay for qualified medical and dental expenses with pre-tax money that the employee contributes to the plan. For 2023, the maximum contribution allowed to fund such a plan is $3,050 ($3,200 for 2024). A big advantage to having an FSA is that the employee can use the full amount as of the beginning of the year, even before making the first contribution. Generally, if the full amount is not used during the year, it does not carry over unless the employer has the plan provide for a grace period or a carryover.

A grace period of up to 2½ months after the end of the plan year can be provided in the plan during which employees may use amounts left in an FSA account at the end of the plan year to pay for qualified medical expenses. Any amounts not used at the end of the grace period are nonrefundable. A carryover provision allows an employee to carry over up to $610 for 2023 ($640 for 2024) in an FSA account at the end of the plan year to the immediately following plan year. The employer can, however, have the plan specify a lower maximum carryover amount. Any unused amount in excess of the amount allowed as a carryover by the plan is forfeited at the end of the plan year. A plan may allow either the grace period or a carryover, but it may not allow both.

Utilizing bonus depreciation and expensing options to reduce business income

For self-employed and business clients, the generous bonus depreciation rules in Sec. 168 as well as the expensing election rules in Sec. 179 can significantly reduce taxable income and significantly lower the cost of equipment. For 2023, up to $1,160,000 of qualifying business property can be expensed for tax purposes. Under the bonus depreciation rules, 80% of the cost of an asset placed in service during 2023 can be written off, with the remainder being depreciated over the depreciable life of the asset. Thus, if a client is considering the purchase of a substantial business asset and has income in 2023 that can offset the cost, it may be appropriate to make that purchase before the end of the year.

Investment portfolio review

Finally, consider a year-end review of the client’s investment portfolio to identify any necessary adjustments to their investment strategy. Look at the client’s nonretirement accounts — if gains have already been realized, consider selling holdings with losses to offset the gains and reduce taxable income.

Additionally, a year-end review of a client’s risk tolerance is a good idea. According to Tricia Welsh, a certified financial planner at Fox Hill Wealth Management in Dedham, Mass. (and the author’s sister), “a risk tolerance analysis is particularly helpful after clients have experienced a decline in the stock market because they are better able to understand how they feel about risk when their accounts have declined in value. This, in turn, also helps them in adjusting their stock and bond portfolios going forward because they have a better understanding of how much of a market downturn they are comfortable with in exchange for higher potential returns.”

— Barbara Bryniarski, CPA (inactive), MST, is a former executive editor at Parker Tax Publishing. To comment on this article or to suggest an idea for another article, contact Dave Strausfeld at David.Strausfeld@aicpa-cima.com.