While many of us were hoping that 2022’s market volatility and challenges for investors would be in the past, this year has reminded us that an unpredictable market is, actually, normal.
The year so far has given us a stock market filled with highs and lows, a flat bond market, high mortgage rates, rising interest rates and the global effects of wars in Europe and the Middle East.
Yet as with any year, a general financial review is necessary at year-end to stay focused on your financial goals and objectives. With that in mind, here are a few year-end topics that would be prudent to review:
Tax-loss harvesting
Tax-loss harvesting is an investing approach used for taxable accounts. Retirement accounts do not qualify.
To take advantage of tax-loss harvesting, consider selling select investments at a loss to help offset tax implications from other holdings that have generated taxable capital gains. Eligible investments aren’t limited to stocks or stock funds, which means losses from bonds and other asset classes can be used to offset gains as well.
Additionally, if losses are larger than gains, you can use the remaining losses to offset up to $3,000 of ordinary taxable income (for married couples filing separately, the limit is $1,500). Any amount over $3,000 can be carried forward to future tax years.
The impact of tax-loss harvesting can be significant for taxable account holders with high incomes. However, an investor selling securities as part of a tax-loss harvesting strategy should trade cautiously due to the Internal Revenue Service restriction known as the wash-sale rule. This states that if you sell a security at a loss and buy the same or a “substantially identical” security within 30 days before or after the sale, the loss is typically disallowed for current income tax purposes.
Required minimum distribution
Unless your retirement funds are in a Roth IRA, you may need to take the annual required minimum distribution from your individual retirement account by year-end. If your 70th birthday was before July 1, 2019, you began taking the RMD at age 70 ½. However, due to changes in federal law as part of the Setting Every Community Up for Retirement Enhancement (Secure 2.0) Act, which was signed into law in December of 2022, these rules changed for others.
In 2023, one change under Secure 2.0 was to delay RMDs from age 72 to begin at age 73 instead. This applies to people who were born between 1951 and 1959. People born in 1960 or later will not be required to take RMDs until age 75.
The distribution amount varies annually and is determined by an IRS table, the year-end balance of your account, and your age. If you miss the window to take your annual RMD, you will be subject to an IRS penalty of 25% of the RMD amount. Before Secure 2.0, this penalty was 50% of the amount of the RMD that was not withdrawn in the required year.
Roth IRA conversion
If your portfolio values are down this year, it may be a good time to convert some of your assets from an IRA to a Roth IRA.
Assets converted from an IRA to a Roth IRA are taxable as income in the year of the conversion. However, following the conversion, Roth IRAs are not subject to RMDs. Additionally, when the funds are distributed from a Roth IRA during retirement, the income is not taxable. Because IRA assets converted to a Roth IRA are taxable, discussing the tax ramifications with a tax adviser or CPA before the conversion would be best.
Inherited IRA RMD for non-spouse beneficiaries
An inherited IRA is an account that is opened when a person inherits an IRA after the original owner’s death. This may happen at the death of a spouse or when a child inherits their parent’s IRA. On Jan. 1, 2020, the IRS proposed changes for a non-spouse IRA beneficiary of a deceased owner who was subject to RMDs.
In 2022, the IRS proposed new guidance requiring the non-spouse beneficiary to take RMDs as well as empty the inherited IRA by the end of the 10th year. A final ruling was expected early this year. But in July, the IRS waived penalties on missed RMDs for 2023 and indicated that final guidance would not be available until 2024.
There are many rules for inherited IRAs and Roth IRAs. Don’t assume all rules for inheriting an IRA are the same for everyone. They are not. Your financial or tax adviser can help you manage your annual distributions.
Annual gifting
In 2023, an individual can give $17,000 to as many people as they want without reporting the gift on their tax return and paying additional tax. This is called the gift tax annual exclusion or exemption.
If the person is married, both individuals can give $17,000 for a total gift to any person of $34,000. This exemption applies to more than cash gifts. Forgiving debt and transferring stock are two other examples that would also qualify if the fair market value of the gift is under the annual limitation.
This amount is adjusted for inflation and can be given annually. Any amount over the annual gift tax exclusion limit is reportable to the IRS for the given tax year.
Cash donations to public charities
For individuals who can still itemize their deductions, this year you may deduct up to 60 percent of your adjusted gross income (AGI) for cash donations to public charities. One caveat is that the 60 percent deduction applies only to cash that is donated to qualified public charities. If you choose to donate non-cash assets to public charities, the deduction falls to a limit of 30 percent of your AGI.
Gifting appreciated securities to public charities
Donating long-term, highly appreciated taxable securities—that is, stocks, mutual funds, and exchange-traded funds (ETFs) that have realized significant appreciation over time—to nonprofit organizations is one of the most tax-efficient ways to give. You receive a tax deduction for the full value of the gift without having to pay the capital gains you would have paid if you sold the securities.
Also, you can significantly increase the amount of funds available for charitable giving because you are not paying capital gains taxes on the gift. In other words, you are giving the full value of the security, not the after-tax net value.
Assets held for one year before they are gifted reap the following benefits:
— Capital gains taxes are avoided on the future sale of the securities.
— A tax deduction is received for the full fair market value of the securities, up to 30 percent of your AGI.
Most banks and brokerage firms can assist you with this transaction but will require you to sign a letter of instruction to transfer the shares to a charity. Do not wait until the last week of December to begin this task, or it may not happen in 2023.
This tax deduction is only relevant if you itemize your deductions on your tax return. If the sum of your deductions falls below $13,850 for single filers or $27,700 for joint filers, this strategy will not help reduce your taxes.
Qualified charitable deductions
At the end of 2015, lawmakers approved a permanent measure allowing individuals who are 70 1/2 years old or older to make qualified charitable distributions (QCDs) directly from their IRAs to their favorite qualified charities.
In addition to the well-known benefits of giving to charity, a QCD offers this additional benefit: the donated amount is excluded from taxable income, unlike regular withdrawals from an IRA, which are taxed as ordinary income. A lower income may also help reduce your Medicare premiums, which are income based.
As year-end approaches, remember that markets will always be unpredictable, and the volatility experienced in the past few years will be no exception. Take the time to review your financial situation with your adviser and implement the strategies you can control before the year is over. When you actively manage your finances and plan for your future, the feeling of personal financial empowerment is justly earned.
Note: This column is intended to be informational only and does not constitute legal, accounting or tax advice.
Teri Parker is a vice president for CAPTRUST Financial Advisors. She has practiced in the field of financial planning and investment management since 2000. Reach her via email at Teri.parker@captrustadvisors.com.
