2023 Year End Tax Planning

There’s a deduction for student loan interest, and taxpayers needn’t itemize to take this write-off. Up to $2,500 of interest paid each year can be claimed as a deduction on Schedule 1 of Form 1040. For 2023, the break begins to phase out for single filers with modified adjusted gross incomes above $75,000…$155,000 for joint filers. It ends for taxpayers with modified AGIs over $90,000 and $185,000, respectively. Parents who help a child repay student loans generally can’t take the write-off unless they are also legally liable on the loans. But, even if a parent paid the loan, a child who meets the modified AGI limits can still take the interest deduction, provided he or she isn’t eligible to be claimed as a dependent on the parents’ return. IRS treats this as if the parents gifted money to the child, who then paid the debt.

Most student loan debt forgiven in 2021 through 2025 is tax-free for federal income tax purposes. This relief, enacted in the March 2021 stimulus law, is an exception to the general rule that cancellation of indebtedness is taxable. IRS has instructed lenders and loan servicers to not issue Form 1099-C to borrowers whose student loans are forgiven during this time period, and the discharged debt is excluded from income. Some states have different rules, which can be confusing. Up to $10,000 from 529 accounts can be used to help pay off college debt of the account beneficiary without having to pay income tax on the withdrawals. It’s important to note that this $10,000 is a lifetime limit, not an annual limit. 529 distributions for student loan repayments that exceed $10,000 are taxable in part to the extent of the excess and are also subject to a 10% penalty.

On individual tax planning, look at the overall impact on 2023 and 2024. The goal is to lower your taxes over both years. Most benefit by accelerating write-offs from 2024 into 2023 while deferring taxable income. Others take the opposite approach. Itemizers have the most flexibility in shifting write-offs, as shown here. If you pay your Jan. 2024 mortgage bill before year-end, you can deduct the interest portion on Schedule A of your 2023 federal tax return. State and local taxes. If under the $10,000 cap and your locale allows it, pay the property tax bill due in Jan. 2024 in Dec. of this year so you can deduct it. Bunch into 2023 charitable gifts you would usually give over multiple years. Think about incurring additional medical expenses before year-end if your medicals are near or have topped the 7.5%-of-adjusted-gross-income threshold. Check out IRS Pub. 502. The list of eligible medicals is broader than you may think. Heed the timing rules for charitable donations and other tax-deductible items. Put checks in the mail by year-end to lock in a 2023 deduction. For charges made with bank credit cards, you can claim the write-off in the year you charged the expense. If pondering home upgrades…go green to claim one of two tax credits: The residential clean-energy property credit is equal to 30% of the cost of solar panels, solar-powered water heaters, geothermal heat pumps and more. The smaller energy-efficient home improvement credit applies to insulation, boilers, central air-conditioning systems, water heaters, heat pumps, exterior doors, windows and the like that meet certain energy efficiency ratings. This credit for 30% of the cost of these eco-savings upgrades used to have a $500 lifetime limitation, but no more. There is now a general $1,200 aggregate yearly credit limit, but some specific upgrades have lower monetary caps, while others have larger ones. If planning for multiple upgrades, think about staggering them over 2023 and 2024.

Don’t forget about the tax credit for buying an electric vehicle. Many new EVs qualify for a credit of up to $7,500. The break is up to $4,000 if buying a used EV. Some high-cost EVs aren’t eligible. The manufacturer’s suggested retail price can’t exceed $55,000 for sedans and $80,000 for vans, SUVs and pickup trucks. There’s an income limit. Modified adjusted gross income can’t exceed $300,000 for couples, $225,000 for household heads or $150,000 for singles. For used-EV buyers, the modified AGI thresholds are $150,000, $112,500 and $75,000, respectively. If you wait until 2024 to buy an EV, you can opt to monetize the credit.

Make the most of your generosity when donating to charitable organizations. Contribute appreciated property, such as stocks or shares in mutual funds. If you’ve owned the property for more than a year, you can deduct its full value in most cases if you itemize. Neither you nor the charity pays tax on the appreciation. Don’t donate assets that have dropped in value. If you do, the loss is wasted. Use your annual gift tax exclusion. You can give each person up to $17,000… $34,000 if you are married…this year without paying gift tax, filing a gift tax return or tapping your lifetime estate and gift tax exemption. Recipients aren’t taxed on gifts. Gifts over the exclusion amount will trigger the filing of a gift tax return for 2023. But you won’t owe federal gift tax unless your lifetime gifts exceed $12,920,000.

Charitable donations made directly from a traditional IRA can save taxes. People 70½ and older can transfer up to $100,000 yearly from IRAs directly to charity. Qualified charitable distributions can count as RMDs, but they’re not taxable and they’re not added to your AGI. The QCD strategy is an effective way to get tax savings from charitable gifts for taxpayers not itemizing because of higher standard deductions.

Max out your 2023 401(k) and IRA contributions. You have until Dec. 31 to put money in 401(k)s and other workplace retirement plans, and until April 15, 2024, to contribute to an IRA for 2023. You can stash up to $22,500 in a 401(k)…$30,000 if age 50 or up. The 2023 payin cap for IRAs is $6,500, plus $1,000 more if 50 or older. Consider whether it’s the right time to convert a traditional IRA to a Roth IRA. You’ll have to pay tax on the converted amount, but future earnings are tax-free. Among the factors to consider in making your decision: Income tax rates for 2023 and later years. If you expect the rate you will pay in retirement to be the same or higher than the rate on the conversion, then switching to a Roth can pay off taxwise. Roths don’t have required minimum distributions, unlike traditional IRAs. Whether your account value is depressed and/or whether you think it will rise. And income from the conversion will increase your adjusted gross income, thus potentially triggering higher Medicare premiums two years down the line. Note you don’t need to convert the entire amount to a Roth in one swoop.

Your investment portfolio provides plenty of tax-saving opportunities. See if you qualify for the 0% rate on long-term gains and qualified dividends. If taxable income other than long-term gains or dividends doesn’t exceed $44,625 on single returns, $59,750 for head-of-household filers or $89,250 on joint returns, then your qualified dividends and profits on sales of assets owned more than a year are taxed at a 0% federal rate until they push you over the threshold amounts. The 0% federal rate isn’t all gravy. Zero-percent-rate gains and dividends might not be taxed at the federal level, but they do hike adjusted gross income. The extra AGI can cause more of your Social Security benefits to be taxed. Also, your state income tax bill may jump since many states tax gains as ordinary income. If you’re not eligible for the 0% rate, there is always the 15% or 20% rate. The 20% rate on long-term capital gains and qualified dividends starts at $492,301 for singles, $523,051 for heads of household and $553,851 for couples filing jointly. The 15% rate is for filers with incomes between the 0% and 20% break points.

Know the rules on capital losses if you have some duds you want to sell. Capital losses offset capital gains plus up to $3,000 of other income. Excess losses are then carried over to the next year and can help offset future capital gains. If you have capital loss carryforwards, cull your portfolio for capital gains.

Be aware of the sneaky wash-sale rule. It prohibits a capital loss write-off on the sale of securities if you purchase identical securities up to 30 days before or after the sale. The recognized loss isn’t gone forever…it’s only suspended. That’s because the loss is added to the tax basis of your replacement securities. that’s because your net gains…up to the carryover amount…won’t be taxed at all.

There are generous write-offs for business asset purchases this year. Businesses can save lots on taxes with first-year 80% bonus depreciation. Firms can deduct 80% of the cost of new and used qualifying business assets, with lives of 20 years or less, that they buy and place in service by Dec. 31, 2023. Purchase and place assets in service this year if you want the 80% break. It falls to 60% next year, 40% in 2025, 20% in 2026 and ends after 2026. Expensing is available. In 2023, businesses can expense up to $1,160,000 of new or used business assets. This limit phases out once more than $2,890,000 of assets are put into service during 2023. Note that the amount expensed can’t exceed the business’s taxable income. Bonus depreciation doesn’t have this rule.

See if you can take advantage of the 20% deduction for pass-through income. The self-employed and owners of LLCs, S corporations and other pass-through entities can deduct 20% of their qualified business income, subject to limitations for individuals with taxable incomes of more than $364,200 for joint filers and $182,100 for all others. If you’re close to or just above the income limits, consider accelerating deductions or deferring income so that you can come in under the dollar thresholds for the year. Gig workers who aren’t employees can claim this write-off from their earnings. Schedule E rental income may be eligible for the deduction in some cases.