Uncle Sam, Here I Come

The 2022 tax period came to an end on October 15th, and we know the last thing you want to think about is our good old friend, Uncle Sam, but hear us out! He extended his stay through October 15^th and maybe took more of your time and money than you anticipated. And he’ll come knocking again in the new year with the arrival of your 1099’s, W2’s, K-1’s, and other tax documents.

That’s why this holiday season, we’re here to help you prepare for the 2023 tax season. Let’s talk about the tax planning opportunities you still have time to implement before the end of the year to say “Uncle Sam, here I come” when the new year starts.

Wait… What is Tax Planning?

Tax planning refers to identifying potential planning opportunities to keep your lifetime tax liability as low as possible. Tax planning is different than tax preparation (usually done by your CPA or an online service like TurboTax), which is focused on filing your annual tax return.

Tax planning is a concept that goes beyond solely minimizing taxes year-to-year. We focus on developing tailored strategies to maximize tax efficiency while keeping your long-term financial goals in mind. There are many potential strategies to take advantage of. Here are some of the common strategies we help execute:

Income Recognition Strategies

Roth Conversions: Do you have a disproportionate level of your portfolio in tax-deferred assets such as a 401(k) or Traditional IRA? Have you recently retired early, and now your annual income is significantly lower? These are some of the triggers that may signal an opportunity to do a Roth conversion. A Roth conversion would allow you to voluntarily recognize more ordinary income by converting tax-deferred assets (Traditional IRA) to tax-free assets (Roth IRA).

Tax-Deferred Account Distributions: Do you have a lower than usual income this year? Are there any large expenses on the horizon, such as a home remodel project or a new car purchase? By planning early for large expenses, you can be strategic about the account distributions you take in the current tax year. This concept is known as “tax bracket filling” and can be used to plan, spread out, and optimize income distributions to prevent you from moving into a higher tax bracket.

Concentrated Stock Diversification: Do you have a particular stock that is highly concentrated? If so, it may be worth reviewing your year-to-date realized capital gains to determine if there is room to sell some of that highly appreciated stock and intentionally reach a particular capital gains target. It is also important to review your prior year tax return to see if there is any capital loss carryover that can offset your current year capital gains.

Income Reduction Strategies

Direct Charitable Giving: Are you philanthropically driven? Year end is a great time to organize your charitable endeavors as it may help to provide a reduction in total tax liability. It is important to review which giving method (e.g., cash, stock, charitable gift fund contribution) is the most tax-effective for you. One option is making an outright gift of cash or securities to a qualified 501(c)(3) organization. This will factor into your calculation of itemized deductions that your CPA will facilitate.

Gifting to a Donor Advised Fund (DAF): Do you have an unusually large income this year – perhaps from a business sale or large capital gains? You can help reduce your tax burden by making a substantial gift to a Donor Advised Fund (DAF). Rather than taking a smaller tax deduction each year, you would be taking a more meaningful deduction in the abnormal, high-income year that you need it most. The qualified, irrevocable gift to your DAF account can be spent down through the rest of your life by making grants to qualifying non-profit organizations of your choice.

Qualified Charitable Distributions (QCD’s): Are you charitable in nature, but find yourself consistently taking the standard deduction on your tax return? If you are over the age of 70 ½, you are allowed to give up to $100,000 per year from your IRA to qualified 501(c)(3) organizations completely tax free. These charitable gifts from your IRA can count towards your required minimum distributions (RMD’s). While you cannot take a charitable deduction with QCD’s, you are able to spend down tax-deferred funds without adding any income to your tax return.

Tax-Loss Harvesting: Do you plan on incurring substantial capital gains during a particular tax year? If so, a Coldstream Wealth Manager can help build a portfolio aimed at regularly harvesting portfolio losses while maintaining your overall exposure to the markets. It is important to alert your Wealth Manager of any substantial capital gains already realized, so they can help reduce your tax exposure by intentionally realizing losses.

Other Questions that Can Signal a Tax Planning Opportunity

• Do you plan on making annual gifts to family members? The gift exclusion rose to $17,000 per person in 2023 before you would need to file a gift tax return (Form 709).
• Have you reviewed your employer retirement plan lately? Are you maximizing your contributions? Does your plan allow for after-tax contributions and in-plan Roth conversions? Have you prepared to set up your contribution elections for 2024?
• Do you have access to a deferred compensation program?
• Are you taking a monthly withdrawal from your portfolio to supplement cash flow? Should this be coming from a taxable account, an IRA, or both?
• Are you considering starting your Social Security Retirement benefit soon?

If you answered “yes” to any of the questions above, we recommend connecting with your wealth management team to discuss potential tax planning opportunities. The deadline to execute any tax planning opportunities is December 31st. We highly encourage aiming for a December 15^th deadline to allow for processing times at the custodians. If there aren’t any opportunities worth implementing in 2023, remember it’s never too early to start planning for future years.

DISCLAIMER: THIS MATERIAL PROVIDES GENERAL INFORMATION ONLY. COLDSTREAM DOES NOT OFFER LEGAL OR TAX ADVICE. ONLY PRIVATE LEGAL COUNSEL OR YOUR TAX ADVISOR MAY RECOMMEND THE APPLICATION OF THIS GENERAL INFORMATION TO ANY PARTICULAR SITUATION OR PREPARE AN INSTRUMENT CHOSEN TO IMPLEMENT THE DESIGN DISCUSSED HEREIN. CIRCULAR 230 NOTICE: TO ENSURE COMPLIANCE WITH REQUIREMENTS IMPOSED BY THE IRS, THIS NOTICE IS TO INFORM YOU THAT ANY TAX ADVICE INCLUDED IN THIS COMMUNICATION, INCLUDING ANY ATTACHMENTS, IS NOT INTENDED OR WRITTEN TO BE USED, AND CANNOT BE USED, FOR THE PURPOSE OF AVOIDING ANY FEDERAL TAX PENALTY OR PROMOTING, MARKETING, OR RECOMMENDING TO ANOTHER PARTY ANY TRANSACTION OR MATTER.