Income tax may not be on your mind right now, but we’re always thinking about ways to help you save. Here are some mid-year strategies that may help lower your individual income tax bill for 2023:
Review your tax withholding or estimated payments
Nobody wants the surprise of a larger tax bill — or a smaller refund than you anticipated. This generally occurs when you don’t adjust withholding or estimated payments to account for income changes. Fortunately, there’s still time to ensure the right amount of federal income tax is being withheld from your paycheck for 2023.
Max out generous standard deduction allowances
Consider making additional expenditures for itemized deductions before the year’s end to exceed your standard deduction. For example, making your January 2024 mortgage payment in December 2023 will give you 13 months’ worth of interest in 2023. In addition, prepaying your state and local income and property taxes can decrease your 2023 federal income tax bill because your total itemized deductions will be that much higher.
Review investment gains and losses in your taxable accounts
Have investments in taxable brokerage firm accounts? Consider selling appreciated securities you’ve held for over 12 months. The federal income tax rate on long-term capital gains recognized in 2023 is only 15% for most individuals, but can reach 20% rate at higher income levels (the 3.8% Net Investment Income Tax (NIIT) also can apply here). Biting the bullet on loser stocks and taking the resulting capital losses this year would shelter capital gains, including high-taxed short-term gains, from other sales this year.
Leverage the 0% tax rate on investment income
The current federal income tax rate on long-term capital gains and qualified dividends from securities held in taxable brokerage firm accounts is still 0% when the gains and dividends fall within the 0% bracket. For 2023, you may qualify if your taxable income is $44,625 or less for single filers, $89,250 or less for married couples filing jointly or $59,750 or less for heads of household. What if your income is too high to benefit from the 0% rate? Children, grandchildren or other loved ones may fall into the 0% bracket, so consider giving them some appreciated shares they can then sell and pay 0% tax on the resulting long-term gains. Note that if you give securities to someone under 24, the Kiddie Tax rules may apply.
Consider gifting strategies
When gifting stocks to relatives and other loved ones, don’t give away shares that are currently worth less than what you paid for them. Instead, sell them and take the resulting tax-saving capital loss, then give the cash sales proceeds to your loved one.
Defer income into next year
Because the thresholds for next year’s federal income tax brackets will almost certainly be significantly higher thanks to inflation, deferred income might be taxed at a lower rate.
Don’t overlook estate planning
The unified federal estate and gift tax exemption for 2023 is a historically huge $12.92 million, or effectively $25.84 million for married couples. Your estate plan may need updating to reflect the current tax regime or various life changes. Be aware that in 2026, the unified federal estate and gift tax exemption is scheduled to fall back to what it was before 2017 tax reform with a cumulative inflation adjustment for 2018–2025. That might put it in the $7 million to $8 million range, depending on what inflation turns out to be through 2025.
We hope you found some useful ideas and strategies in this post. Our goal is to get you thinking about tax planning ideas and potential moves we can make to minimize your taxes before the end of the year. Don’t have a trusted advisor on your side? Give us a call at (973) 301-2300 to learn more about our tax planning services.
This document is for informational purposes only and should not be considered financial advice. Be sure to consult with a knowledgeable tax adviser regarding your taxes.