The tip of every 12 months brings many tax planning alternatives for monetary advisors and their shoppers, and in line with Jeff Levine, Kitces.com’s lead monetary planning nerd and Buckingham Wealth Companions’ chief planning officer, late 2023 is not any exception.
Talking throughout a tax-focused webinar a couple of days forward of Thanksgiving, Levine mentioned there was loads for monetary advisors and their shoppers to be glad about this 12 months, even with some massive lingering challenges within the markets and questions on what 2024 might deliver. Inflation, whereas excessive, has slowed, and retired buyers can now reliably supply higher-yielding revenue portfolios with much less threat.
As Levine famous, some tax planning issues apply annually, from taking the right required minimal distributions to making sure correct withholdings on earned revenue and funding returns. Nevertheless, there are additionally distinctive gadgets to think about in any given calendar 12 months that rely on current market actions, anticipated authorities actions and particular person shoppers wants.
In line with Levine, the tip of 2023 represents a very lively time in relation to tax mitigation issues, due in no small half to the friendlier markets and to anticipated adjustments in tax legal guidelines that can take impact with the sunsetting of key provisions of the Tax Cuts and Jobs Act on the finish of 2025.
Except Congress takes motion within the interim, this implies shoppers have about two years to think about, examine and enact varied property planning methods that will both be lowered or totally eradicated come 2026. Add these issues to the conventional yearly burden of tax administration and the approaching 12 to 24 months will undoubtedly be a “tax crunch time,” Levine warned.
12 months-Finish Roth Conversions
As Levine emphasised, by this time within the 12 months, an advisor ought to be capable of fairly estimate most shoppers’ adjusted gross revenue and taxable revenue for 2023.
This implies advisors and their shoppers can now start to make a dependable name as as to whether 2023 represents a low marginal price 12 months for a given particular person or couple, which in flip permits the advisor to evaluate the attractiveness of Roth conversions. Talking usually, Roth conversions will probably be engaging in years when a shopper has decrease earned revenue and might due to this fact pay the bottom potential price on property being transformed.
Ideally, Levine mentioned, a shopper could have money available to pay the tax on the conversion with out having to liquidate any investments, however there are additionally occasions when it could nonetheless make sense to transform and pay the taxes with the proceeds.
As Levine identified, a Roth conversion technique can have many advantages for the unique account proprietor throughout life, however many purchasers additionally overlook the potential upside for account beneficiaries after the unique account proprietor’s dying.
As in prior years, the ultimate quarter of 2023 represents a good time for advisors to interact their shoppers in these deeper planning conversations, Levine instructed.
Tax Loss Harvesting
In line with Levine, over the previous a number of years, the availability of tax-loss harvesting providers to advisory shoppers has change into “desk stakes.”
As such, he warned advisors on the road that, if they don’t seem to be already engaged in some degree of pretty subtle tax-loss harvesting, they’re falling behind the business normal.
Whereas loss-harvesting actions may be strongest throughout years with larger market losses, advisors with the best method can nonetheless assist to considerably cut back their shoppers’ tax burdens in combined market years equivalent to 2023. Doing so, Levine mentioned, usually entails proactively harvesting interim losses all year long, together with in November and December.
“Keep watch over year-end capital good points distributions,” Levine beneficial. “Additionally, be careful for wash gross sales, and take into account locking in any crypto losses.”
Levine additionally beneficial that advisors and shoppers rigorously consider the potential to make tax-efficient bond swaps, however they should be conscious of the tax guidelines when shopping for bonds with a market low cost.
Medicare Open Enrollment
As Levine famous, on a nationwide foundation, the typical month-to-month premium for Medicare Half D prescription drug protection is about to lower barely in 2024, and the small reprieve is because of a wide range of components together with key coverage adjustments made as a part of the Inflation Discount Act.
This will probably be welcomed information for a lot of retirees who’re dwelling on a hard and fast revenue, particularly given the comparatively modest 3.2% Social Safety cost-of-living adjustment set for 2024, however analysis exhibits the typical decline in Half D premiums really masks a dramatic improve anticipated in a number of states with sizable retiree populations, specifically California, Florida, New York, Pennsylvania and Texas.