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It’s finally Tax Day. Hopefully, that to-do list item burning in the back of our minds for the past few months has a giant check mark, and you have gained some peace of mind. At least until next year. So why is Tax Day still a good day to talk about taxes? Even though your 2022 returns are nicely filed and wrapped with a bow, now is the best time to address those questions that emerged this year.

Is there still time to fund your IRAs? Why did I receive a preliminary 1099 and then an actual 1099? Can I get rid of my old tax records? Are there any gifts you are giving or receiving? Are you maxing out your 401(k) or 403(b) limits? Have you formed a strategy to fund any 529 plans? Have you given to charity? Is your investing tax-efficient?

If you pondered any of these questions during this tax season, below are more details on ways to take action in the upcoming tax year.

There is still time to fund your IRAs from 2022.

You have until April 18th, 2023, to contribute funds for 2022 to your Roth and Traditional IRAs. This is one of the few areas of tax planning where you can contribute retroactively after the end of the year. The contribution limits for IRAs during 2022 is $6,000, or $7,000 for those 50 and older. Remember, you must have earned income to fund.

Be aware that your 1099s from your investment accounts could be delayed.

Funds or ETFs that hold complex fixed income, real estate, commodities, and other such instruments may be beneficial for you to hold as an investment but take longer to classify their holdings for tax purposes. In the past, most custodians would go ahead and issue a preliminary 1099 early in the tax filing season and then must come back and issue a corrected one in March or early April. This material change would sometimes result in tax filers having to decide if the change warranted filing an amended return. A new trend we are seeing is for custodians to issue a preliminary 1099 when you hold one of these types of investments but make it clear to you that the actual 1099 for filing purposes will not be issued until early to mid-March.

Can you get rid of old tax records?

Per the IRS, you should keep your tax records for three years from the date you filed your original returns. There are other circumstances where the IRS can look back six or even seven years, depending if you claim a loss from worthless securities, had a bad debt deduction, or didn’t include all your earnings on your original Form 1040. Bottom line: the safe timeline to keep records is generally seven years from the date you filed. Thus, for most tax filers, you should have just passed or be approaching the seven-year anniversary of filing your 2016 return.

Make plans for any gifts you may be giving or receiving.

The gift exclusion amount is rising to $17,000 for 2023 (it was at $16,000 in 2022.) This increase allows someone to give up to this amount without tax consequences. Remember, for a married couple, you can essentially gift away twice as much (or $34,000) starting in 2023 without paying a gift tax. These amounts are for a calendar year.

There are new limits if you max out your 401(k) or 403(b).

For 2023 the new limit for maximizing your 401(k) or 403(b) contribution is $22,500. This update represents a $2,000 increase from 2022. For those 50 and older, you can still make a “catch-up” contribution of $7,500 (up from $6,500 in 2022), totaling a maximum contribution of $30,000. 1

Make plans to fund any 529 plans.

You will need to check with your advisor (or do the legwork yourself) because the State tax advantages for 529s can vary significantly between state plans. Still, it’s helpful to know these amounts to take advantage of any possible tax benefits. For State of Alabama residents, the State allows a $5,000 per person ($10,000 for married filing jointly) annual deduction for contributions to the State’s 529 plan. Note this also includes transfers to the State of Alabama plan from other out-of-state plans. So, if you have a 529 plan in another state, you can transfer those dollars (tax-free) to the Alabama plan, have it considered as a contribution for state tax purposes, and benefit from the Alabama state tax deduction. 2

Be smart about how you give to charity.

For those that are charitably minded, it’s always been wise to look at possible strategies that could improve the tax benefits of your gift. With the standard deduction increasing from $25,900 to $27,700 in 2023 for joint filers ($12,950 to $13,850 for those filing individually),  more tax filers will not be itemizing deductions, thus not benefiting from the charitable contribution deduction. Some strategies to consider for those making charitable contributions are charitable lumping, donating appreciated investments, and donating all or part of your Required Minimum Distribution (now for those 73 and older in 2023). For more information on these strategies, reach out to your advisor.

Keep your investing tax-efficient.

Of all the factors that can lower investment returns, taxes are one of the biggest. Keeping any tax effect on your investments as minimal as possible is important. One way to do this is to maximize contributions to tax-advantageous vehicles such as a 401(k), IRA, and 529 plan. Another technique is tax loss harvesting (selling holdings with a loss in order to recognize it for tax purposes and potentially offset gains). Or you may find yourself in a situation where your income will be lower for a year or two, which creates an opportunity to harvest gains (selling holdings with a gain in order to recognize that income in a year in which it will be taxed at a lower rate). A related strategy may be a Roth IRA conversion to take advantage of your temporary lower tax brackets. Finally, for taxable investment accounts, you want to strive to keep the investment distributions (capital gains and/or dividends) to a minimum. This can be done, in part, by selecting funds with a lower turnover rate.

The fact is everybody must pay taxes. Using your resources to sort through the information at hand makes us all more confident taxpayers. Taxes often inform how we make financial decisions, so being tax-conscious does not have to be paralyzing. Instead, we hope it is empowering to feel knowledgeable about your taxes. And as always, we at Bridgeworth are happy to partner with you and your other strategic advisors to gain that clarity and confidence.

As you consider these actions, be sure to discuss them with your Bridgeworth professional and your CPA or tax preparer to make sure decisions work in unison from a tax, financial planning, and overall investment standpoint.


Sources:

  1. https://www.irs.gov/retirement-plans/plan-participant-employee/retirement-topics-contributions
  2. https://www.collegecounts529.com/plan-benefits/tax-advantages/#:~:text=Each%20year%2C%20Alabama%20taxpayers%20can,made%20to%20CollegeCounts%20up%20to%3A&text=%245%2C000%20single%20filers,jointly%20when%20both%20spouses%20contribute

Bridgeworth Wealth Management is a Registered Investment Adviser.

Mr. Hocutt is a Certified Public Accountant (CPA) and prepares individual tax returns. This activity is independent of Bridgeworth Wealth Management.

The information and material presented in this COMMENTARY are for general information only and do not specifically address individual investment objectives, financial situations or the particular needs of any specific person who may receive this commentary. Investing in any security or investment strategies discussed herein may not be suitable for you, and you may want to consult a financial advisor.

Nothing in this material constitutes individual investment, legal or tax advice. Investments involve risk and an investor may incur either profits or losses.

Past performance should not be taken as an indication or guarantee of future performance.

Before investing, investors should consider whether their home state or their designated beneficiary’s home state offers any state tax or any other benefits that are only available to residents of that state. Any state tax benefits associated with a 529 plan apply only to residents of the state sponsoring the plan. 529 plans value will fluctuate so that an investor’s shares, when redeemed may be worth more or less than their original cost.

Investors should consider the investment objectives, risks, and charges and expenses of the plan carefully before investing. An official statement, which contains this and other important information, can be obtained from your financial professional. Please read carefully prior to investing.

Withdrawals may be subject to state income taxes depending on the participant’s state of residence. Non-qualified withdrawals are subject to a 10% penalty. 

Participation in a 529 plan does not guarantee that contributions and the investment return, if any, will be adequate to cover future tuition and other higher education expenses or that a beneficiary will be admitted to or permitted to continue to attend and institution of higher education.

Bridgeworth Wealth Management does not underwrite 529 plans.

Bridgeworth is now a part of Savant Wealth Management as of 11/30/2023. Savant Wealth Management (“Savant”) is an SEC registered investment adviser headquartered in Rockford, Illinois.