Your last opportunity to adjust many of the levers affecting how much you will owe in 2023 taxes is the month of December. It also presents a good time to start taking action on your 2024 taxes, especially because you still have the ability to alter the timing of when various deductions and liabilities are realized.

The following suggestions focus on areas applicable to large numbers of individual investors and serve as a supplement to our annual tax guide in this issue. If your taxes are complex or you have specific questions regarding the tax code, contact a tax professional. Meeting with them before the end of the year may allow you to reduce or adjust your tax liabilities for 2023 and/or 2024 and potentially what you pay in Medicare Part B premiums in 2025 and 2026, respectively.

Review Your 2022 Tax Return

The higher standard deduction and the cap on deducting state and local taxes (SALT) included in the Tax Cuts and Jobs Act (TCJA) of 2017 remain in effect for tax-year 2023. If your taxable income or deductions have not significantly changed from last year, look at your 2022 tax return. Pay attention to what you paid in taxes as well as what you owed or how much of a refund you received. Also, take note of your investment losses.

If you unexpectedly owed money last year or received a larger refund than you anticipated, you may need to adjust your withholdings or estimated tax payments.

Those who are working should take advantage of the Internal Revenue Service’s (IRS) Tax Withholding Estimator. This tool calculates what you could end up owing or receiving based on data provided from your paycheck and a short questionnaire. It then offers suggestions for adjusting your Form W-4.

If you are retired or are otherwise making quarterly tax payments, you should estimate your 2023 tax liabilities. Our Tax Forecasting Worksheet, which is included with the tax guide, can help. If you use tax software such as TurboTax, fill out a new return based on the data you have. If you haven’t purchased the 2023 software yet, include enough margin of error to account for the approximate 7% inflation adjustment made to various 2022 income limits, deductions and exemptions. If it looks like you’re going to owe or receive a big refund, adjust your fourth-quarter estimated payment. The payment is due on January 16, 2024. It can be paid by January 31, 2024, if you file your return by then.

Adjust the Timing of Expenses

If there are expenses where timing is variable, run the numbers as to whether it will be more beneficial to pay them in 2023 or in 2024. An example is the mortgage interest deduction. If you make an extra payment before the end of the year, you may be able to claim the extra interest paid on your 2023 taxes.

Educational spending is another area to check. Adjusting the timing of planned expenses to this year could qualify you to take advantage of the Lifetime Learning Credit on your 2023 tax return. If you live in a state allowing deductions for contributions to 529 college savings plans, you could lower your state tax bill by acting before year’s end.

Total Up All Investment Gains and Losses

If you bought or sold investments in a taxable account, calculate how much in capital gains and losses you’ve realized this year. This includes the sale of stocks, mutual funds, closed-end funds, exchange-traded funds (ETFs), real estate investment trusts (REITs), cryptocurrencies, preferred stock, bonds, options and master limited partnerships (MLPs). Don’t forget any fund distributions. Check with each fund family to see if it announced this year’s distribution and how large it is.

If you have unrealized losses in investments held in taxable accounts, determine if it makes sense to purposely realize a loss for tax purposes. In doing so, be cognizant of the wash-sale rule. It prohibits you from claiming losses on your return if you buy the same or a substantially identical investment within 30 days after selling. The losses can be used to adjust the cost basis of a substantially identical investment purchased within the 30-day window.

If you claim a loss on a stock, you could buy shares of a competitor or a sector or industry ETF to maintain your allocation over the 30-day wash-sale period. You will incur transaction costs and potentially a tax liability for this temporary swapping of investments, however.

Losses offset gains up to an excess of $3,000. If you had more than $3,000 in net losses in 2022, you can apply the excess amount to your 2023 taxes up to the $3,000 limit. Any excess can be carried over to 2024 (including any net losses from 2023 that keep you over the $3,000 limit).

High earners should be conscious of the 3.8% net investment income tax (NIIT). The tax applies to both short- and long-term capital gains realized by married filing joint taxpayers with modified adjusted income (MAGI) above $250,000 ($200,000 if single). If you are close to this threshold, it may make sense to postpone realizing gains until next year, or to realize losses this year on investments that have declined in value.

Strategically realizing gains can help investors who have lower incomes. Married couples filing joint returns and single filers with taxable income below $89,250 and $44,625, respectively, will pay a 0% tax on long-term capital gains for 2023. If you fall into this bracket this year but expect to be above next year’s inflation-adjusted limits, it may make sense to realize the gains now and buy back the investment later. This will reset your cost basis at a higher level. However, be aware that you will incur transaction costs and may incur commissions or fees; plus, you run the risk of the investment potentially appreciating while you are out of it.

Strategize Your Charitable Donations

Deducting charitable donations has become harder as well under the TCJA. The standard deduction for married couples filing joint returns is $27,700 and $13,850 for single filers in 2023. These higher levels combined with the $10,000 cap on deducting state and local taxes make it difficult for many to benefit from itemizing.

One method around this hurdle is to bunch charitable donations into a single year. Rather than giving every year, combine the amounts you would give over a period of a few years into a single year. This will result in a bigger deduction for the year in which the donation is given. Just be aware that the cap on deducting cash charitable donations is 60% of one’s contribution base (typically adjusted gross income, or AGI).

Those age 70½ or older can take advantage of qualified charitable distributions (QCDs). These donations are made directly from an individual retirement account (IRA). They offset required minimum distributions (RMDs) dollar for dollar up to $100,000 per year. (You do not have to have started taking RMDs to make a QCD, but it’s best to make a QCD prior to taking any portion of your RMD for the current year.) Furthermore, QCDs directly reduce taxable income, which means the donor gets the tax break automatically regardless of whether they take the standard deduction or choose to itemize. (The QCD limit will begin to adjust for inflation in 2024.)

When Feasible, Bundle Medical Expenses

The 7.5% threshold for claiming medical deductions was made permanent by the Consolidated Appropriations Act of 2021. If your medical expenses for 2023 are already close to this level, it can make sense to realize additional expenses this calendar year. You’ll have to act quickly to schedule any appointments because the expenses must be realized by December 31. Alternatively, if you won’t hit the threshold, consider delaying any qualifying expenses until after January 1, 2024, if medically safe to do so. This may help you reach the threshold in 2024.

A wide range of expenses qualify for the deduction, including mileage and transportation. If you’re near or above the threshold, consider refilling your prescriptions by December 31, if possible. IRS Publication 502 lists what types of expenses qualify for the medical deduction.

Take Your Full RMD

The SECURE 2.0 Act raised the required beginning date (RBD) for taking RMDs. Distributions are mandatory from most retirement accounts by December 31 for those who are age 73 or older in 2023. Roth IRAs do not have any required distributions. Neither do 401(k) plan accounts where the employee is still working and is not a 5% owner of the firm. [Those not meeting this specific requirement must take an RMD from a 401(k) account.] RMDs must be taken from Roth 401(k) and Roth 403(b) accounts this year, but not in 2024 and beyond.

Failure to take an RMD by the end of a calendar year will result in the amounts not withdrawn being taxed at 25%. The penalty will be 10% if the missed RMD is taken and the penalty is paid within two years.

A person with multiple IRAs can combine the RMDs from each account into a single withdrawal from just one of the IRAs. If more than one 401(k) account is owned, the RMDs must be taken from each account.

Check with your broker or mutual fund company to see if RMDs can be automated. You may be able to have your distributions paid monthly, quarterly or annually. Not only will this provide a steady stream of cash, but it will also ensure that the full amount is withdrawn each year. You may also be able to have taxes withheld from the distribution.

Plan Retirement Savings Contributions

Those who have earned income (e.g., wages) should take the time to plan out their retirement savings contributions to be made in 2024. These include contributions for the 2023 tax year, which can be made up until April 15, 2024, to traditional and Roth IRA plans. Making contributions throughout the year as opposed to at the end of the year gives the amounts invested more time to benefit from compounded returns.

The Saver’s Credit may also be a consideration. Married joint filers and single filers with AGI below $73,000 and $36,500, respectively, for the 2023 tax year can receive a credit of up to $2,000/$1,000. Contributions to an employer-sponsored plan or an IRA qualify for the credit.

Calculate Your Medicare IRMAA Bracket

Medicare Part B premiums and their income-related monthly adjustment amounts (IRMAAs) are based on MAGI from two calendar years prior. In this case, MAGI is defined as your AGI from your tax statement plus tax-exempt interest.

Many married and single retirees fall under the threshold for paying an additional charge above the standard premium. The initial breakpoints for 2024 are 2022 MAGI of $206,000 for married filing jointly and $103,000 for singles. The initial breakpoints in 2023 were 2021 MAGI of $194,000 for married couples filing joint returns and $97,000 for single filers. Those close to the thresholds may be able reduce their 2025 and 2026 premiums (based on 2023 and 2024 MAGI, respectively) by realizing additional deductions and/or delaying Roth IRA conversions.

Make a Roth IRA Conversion

Roth IRA conversions also make sense if you expect your taxes to be higher or if you believe future RMDs will eventually put you into a higher Medicare IRMAA bracket. The advantages of a Roth IRA conversion include tax-free withdrawals and no distribution requirement. Conversions are, however, taxable in the year they occur and once completed they cannot be undone.

Because they are taxable, it’s often prudent to spread these conversions out over a period of years. A rule of thumb is to only roll over enough to put you up to, but not above, the thresholds for a higher tax bracket and higher Medicare premiums. (As mentioned, Medicare premiums are based on income from two years prior.) Estimating your 2023 taxes now can help you decide how much you can rollover without incurring a much higher-than-expected tax bill.

The deadline for completing a Roth IRA conversion is December 31, 2023. It’s best to file your paperwork as early in December as possible to ensure the conversion is done before the end of the year.

Make Gifts to Loved Ones

The annual gift tax exclusion is $17,000 ($34,000 for consenting couples) for 2023. Gifting to heirs now allows tax-free transfers—up to the annual limit—and does not count against the lifetime tax exclusion.

Contribute to a Health Savings Account

Contributions to health savings accounts (HSAs) are tax deductible in the year they are made. Withdrawals from HSAs are tax-free if used to pay for qualified medical expenses.

You must be enrolled in a high deductible health insurance plan and not enrolled in Medicare to contribute.

The contribution limits in 2023 are $7,750 for those with family coverage and $3,850 for those with individual coverage. An additional $1,000 per year can be contributed by those age 55 or older. 

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