By Mark N. Petersen, CPA, CFP®, CP, Affluent Wealth Planning
The holidays are upon us! That must mean it’s time to roll up my sleeves and get to work on year-end financial planning – with an emphasis on 2023 income tax. One consideration this year is that we’re two years from the expiration of the Tax Cuts and Jobs Act of 2017 (TJCA). This will mean:
· Elimination of the state and local tax cap of $10,000
· The return of other itemized deductions in 2026
· Reversion of individual income tax rates to the 2017 tax bracket amounts (maximum individual tax rate of 39.6%)
· A reduction in the lifetime gift and estate tax exemption amounts
· Elimination of the qualified business income deduction for flow-through entities such as partnerships, S-corporations and LLCs
With taxes in mind, here are nine things my wife and I look at when we do our year-end planning.
1. Complete the Current Year Tax Estimate
Because there are no major changes in tax legislation for 2023, tax software was out on November 15th, just before Thanksgiving. As has become an annual ritual, I used the holiday weekend to review any year-end actions which may be necessary or desired to impact my 2023 income tax liability. This includes a review of traditional IRA contributions, which may lower adjusted gross income (AGI). AGI impacts multiple other tax considerations.
2. Estimate Next Year’s Taxable Income and Sources
Interest rates have increased significantly in the last two years. The benefit: more interest income on cash and money market accounts. The downside: increased interest income is ordinary, taxable income taxed at potentially the highest individual income tax rate (37% in 2023).
Additionally, there’s no income tax withholding on interest income. United States Treasury Bills (1-year maturity or less) offer competitive interest rates and in many states are not taxable income for state income tax. Many states also exempt retirement income, which may include Social Security. However, retirement income is generally included for income related monthly adjustment amount (IRMAA) computations to determine if supplemental payments are due for Medicare Part B and Medicare Part D premiums.
3. Plan for the Expiration of TJCA 2017
The biggest change to the Tax Cuts and Jobs Act of 2017 is that the gift and state tax exemption amounts will revert to the 2017 level of $5 million plus inflation adjustments for 10 years. The potential supplemental estate tax liability for a married couple may be in the $5.6 million range for not utilizing the current exemption amount before it reverts to the 2017 inflation adjusted amount.
Attorneys are telling us that 2024 is the time to review and change your estate plan as the lines may be out the door in 2025 for taxpayers wanting to make last minute changes to take advantage of the higher exemption amount.
4. Review Retirement Plan Contributions
I review retirement plan contributions for increased December contributions that may allow me to squeeze a few more dollars into the plan. I also review next year’s contribution limits and adjust payroll contribution amounts to set my target retirement plan goal and HSA contribution goal for next year.
Lastly, I allocate the retirement plan contributions between Roth and Traditional 401(k) accounts. This has a direct impact on next year’s taxable income and projected income tax liability.
5. Plan for Big Expenditures
My wife and I discuss any needed or discretionary home improvements or automobile replacements for the next 12 to 24 months, including estimated cost and timing. We also review the asset levels allocated toward funding anticipated improvements with allowances for cost overruns and funding for any major purchases or home improvement projects.
6. Tally Up the Equity
We tally the change in our cash accounts, retirement plan contributions and mortgage principal reduction to see how much equity we “saved” toward retirement. This excludes financial market changes in the value of our investments, which we track separately. We control the saving amount, but we have less control over investment performance.
7. Review Life Insurance
We review our life insurance policies for cash-value accumulation, looming term policy expiration dates, long-term care premium increases and adequacy of coverage. We also take steps to implement any changes which may be necessary to take advantage of age and health (insurance tends to get more expensive as you get older, and your health rarely gets better with time).
8. Review Health Insurance
After we’ve looked over our life insurance, we review our health insurance during open enrollment periods for adequacy of coverage and appropriate changes in coverage. This is a good idea for all company benefits which are offered during open enrollment periods.
9. Answer the Big Question
From a big picture standpoint, we answer the question, “Are we on track toward our retirement goal?”
I have one advantage in going through the year-end planning process: When I have the conversation, I am having it with myself and my wife, so I don’t have to schedule an appointment.
The advantage to our clients is that we think about these things every day and are prepared to have the conversation with you whenever you are ready.
Call your wealth advisor today to schedule your year-end planning conversation and start 2024 with your 2023 year-end planning complete.
Mark Petersen is not affiliated with Cetera Advisor Networks, LLC. For a comprehensive review of your personal situation, always consult with a tax or legal advisor. Neither Cetera Advisor Networks LLC nor any of its representatives may give legal or tax advice.The opinions contained in this material are those of the author, and not a recommendation or solicitation to buy or sell investment products. This information is from sources believed to be reliable, but Cetera Advisor Networks LLC cannot guarantee or represent that it is accurate or complete.
