Year-End Planning: Keep More of Your Hard-Earned Money

As the year winds down and we dive into the holiday season, it's often easy to overlook a crucial item on your to-do list; year-end tax planning. It may not sound like the most pressing issue to think about but a solid plan before the year wraps up can make all the difference when you file your taxes next year. In this post, we’ll discuss why year-end planning is essential and how it can benefit you.

Understanding Taxable Events

Year-end tax planning begins with identifying large taxable events that have happened in the past year. These may include more familiar events such as bonuses, investment income, rental income, and capital gains. This may also include unique equity events such as Incentive Stock Options (ISO), Nonqualified Stock Options (NSO), or Restricted Stock Units (RSU) income.

Understanding Tax Consequences

Each taxable event comes with a different tax consideration. Working with your accountant to understand the consequences of each will assist you in preparing for any tax due come April. There are two main types of income to watch out for: withheld and unwithheld income.

Withheld Income – these types of income are nominally withheld by the IRS and applicable state tax authority. Examples include:

- Wages

- Bonus

- NSO exercises

- RSU income

The potential problem with withheld income is it may be withheld at a lower tax rate than you will eventually be taxed on, leading to a surprise tax bill when you file your return. NSOs and RSUs especially are withheld at nominal rates but with high or fluctuating stock prices, the rates of withholding can be lower than your marginal tax rate and can easily lead to a large surprise tax bill.

Unwithheld Income – types of income or other taxable events that are not withheld require any associated tax liability to be paid with an estimated tax payment or payment with your tax filing. Some examples include:

- Investment income (interest & dividends)

- Capital gains

- Material ISO exercises

Depending on the materiality of the unwithheld event, payments may need to be made before filing in April to avoid underpayment penalties and interest. Interest on underpaid tax liabilities is now 7% from the IRS, 7% from the FTB and 12% from New York. Working with your accountant before year end to identify material transactions can potentially save thousands in interest and penalties.

Taking action before Year-End

Waiting until you file your taxes may be too late to deploy tax savings strategies which must be completed before December 31st to be reflected on your return. Some potential strategies include:

- Tax Loss Harvesting

• Offset capital gains with as-of-yet unrealized capital losses.

• Sale of crypto assets in a loss position.

• Ensure loss harvesting won’t trigger wash sale disallowance.

- Charitable Giving

• Make tax-deductible donations before the year ends to reduce taxable income.

• Donations of appreciated stock to a DAF to avoid taxes on sale of stock.

- Tracking and deploying business expenses

• Ensuring all relevant business expenses for the year are tracked and categorized to reduce your taxable income.

• Planning note: While deductions must be accounted for before year end, certain retirement planning opportunities (i.e. SEP IRAs) can be deployed after year-end.

- ISO disqualified dispositions

• Selling previously exercised ISOs with a large AMTI to reduce AMT and obtain needed liquidity.

• Exercise of ISOs without triggering AMT, avoiding tax, and starting the timer on a qualified disposition.

- Gifting Considerations

• For 2023, taxpayers can gift up to $17,000 ($34,000 if filing jointly) to any recipient without incurring gift tax or using lifetime exemptions. You'll want to ensure the gift is received before 12/31 for it to count for the 2023 tax year. The annual exclusion is set to increase to $18,000 in 2024.

• If considering a 529 superfund, perhaps wait for the 2024 higher annual exclusion, to squeeze more into the educational fund.

• Stock held at a loss is not a good candidate for gifting. Selling the stock to claim the loss, then gifting the cash is an optimal strategy.

Year-end tax planning is a critical part of your financial picture. Optimizing tax saving strategies can alleviate excess tax payments and help reduce potential underpayment penalties and interest. If you have any questions or need assistance with your year-end planning, don’t hesitate to reach out. Our team is here to help guide you through the process and assess if there are tax-saving strategies you can employ before year-end.