The top 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 isn’t any exception.
Talking throughout a tax-focused webinar a number of days forward of Thanksgiving, Levine mentioned there was quite a bit for monetary advisors and their shoppers to be thankful for this 12 months, even with some large lingering challenges within the markets and questions on what 2024 could deliver. Inflation, whereas excessive, has slowed, and retired traders can now reliably supply higher-yielding revenue portfolios with much less threat.
As Levine famous, some tax planning issues apply every year, from taking the proper required minimal distributions to making sure correct withholdings on earned revenue and funding returns. Nonetheless, there are additionally distinctive gadgets to contemplate in any given calendar 12 months that rely on latest market actions, anticipated authorities actions and particular person shoppers wants.
Based on Levine, the tip of 2023 represents a very energetic time with regards 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.
Until Congress takes motion within the interim, this implies shoppers have about two years to contemplate, examine and enact varied property planning strategies which will both be decreased or fully eradicated come 2026. Add these issues to the traditional yearly burden of tax administration and the approaching 12 to 24 months will undoubtedly be a “tax crunch time,” Levine warned.
Yr-Finish Roth Conversions
As Levine emphasised, by this time within the 12 months, an advisor ought to have the ability to moderately 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 charge 12 months for a given particular person or couple, which in flip permits the advisor to evaluate the attractiveness of Roth conversions. Talking typically, Roth conversions can be enticing in years when a consumer has decrease earned revenue and might subsequently pay the bottom potential charge on belongings being transformed.
Ideally, Levine mentioned, a consumer can have money available to pay the tax on the conversion with out having to liquidate any investments, however there are additionally instances 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 consumers additionally overlook the potential upside for account beneficiaries after the unique account proprietor’s loss of life.
As in prior years, the ultimate quarter of 2023 represents a good time for advisors to have interaction their shoppers in these deeper planning conversations, Levine steered.
Tax Loss Harvesting
Based on Levine, over the previous a number of years, the supply of tax-loss harvesting companies to advisory shoppers has turn into “desk stakes.”
As such, he warned advisors on the road that, if they don’t seem to be already engaged in some stage of pretty refined tax-loss harvesting, they’re falling behind the trade normal.
Whereas loss-harvesting actions will be strongest throughout years with greater market losses, advisors with the correct method can nonetheless assist to considerably scale back their shoppers’ tax burdens in combined market years corresponding to 2023. Doing so, Levine mentioned, usually includes proactively harvesting interim losses all year long, together with in November and December.
“Regulate year-end capital positive factors 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 aware 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 ready to lower barely in 2024, and the small reprieve is because of quite a lot of components together with key coverage adjustments made as a part of the Inflation Discount Act.
This can be welcomed information for a lot of retirees who’re dwelling on a set 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 truly masks a dramatic enhance anticipated in a number of states with sizable retiree populations, specifically California, Florida, New York, Pennsylvania and Texas.
