Some Year-End Tax Moves to Lower 2023 Taxes

Ed shares some valuable tax tips for federal employees to review before the year ends.

There are less than two months remaining in the year 2023. As the year draws to a close, there are some tax moves that federal employees and retirees may want to perform over the next 5 to 7 weeks in order to lower their 2023 federal and state income tax liabilities. This column presents three of these tax moves. These recommended tax moves are particularly appropriate to those employees and retirees who invest in non-retirement (taxable) brokerage accounts.

Two items that should be kept in mind. First, when making any of these year-end tax moves, employees and retirees are advised to focus primarily on their overall financial goals rather than merely saving on taxes. Second, a particular tax move that is recommended for one individual may not be appropriate for another individual. Any employee or retiree who is considering making any of these tax moves should first discuss with their financial advisor whether or not a particular tax is appropriate to him or her.

“Tax-Loss Harvesting”

Those individuals who own a non-retirement brokerage account (an investment portfolio consisting of stocks, bonds, open-end funds, closed-end funds, and/or exchange-traded funds) in which a particular investment security’s current value is less than its “cost basis” (“cost basis” consists of what the individual originally paid for the investment plus any reinvested dividends and capital gains) an individual investor may be tempted to hold onto the investment security with the hope that it may recover in value and be worth more than its cost basis. While “patience” is highly recommended when it comes to long-term investing, holding onto an investment security that shows little likelihood of recovering in value may not be the best investment strategy. Individuals with investment “losers” held in taxable accounts may therefore want to sell them in order to create capital losses that can result in possible tax benefits. This strategy is called- “tax-loss harvesting.”

Note that the strategy of “tax loss harvesting” does not apply to investments held in tax-deferred retirement accounts such as the Thrift Savings Plan or an IRA.

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The year 2023 may be an especially good year to consider “tax-loss harvesting”. Among the reasons is that many investors have suffered losses in their investment portfolios due to the stock market mood swings and higher interest rates.

The following are some specific tax rules regarding “tax-loss harvesting”:

Capital losses can be used to offset capital gains “dollar-for-dollar.” Capital gains and capital gains apply to investments that are realized, meaning to investments that were actually sold.
If an individual’s capital losses exceed his or her capital gains, then the individual can apply a maximum of $3,000 per year of net capital losses against other income (other income salary, interest, retirement and rental income). For individuals who file as married filing separately, the limit is $1,500. If the net capital losses exceed $3,000/$1,500, then the excess amounts can be carried forward and used in future years. Individuals living in states with state income taxes should check with their state to see if the state has different rules regarding unused net capital losses.
Losses from the sale of personal-use property such as a personal residence, tools, jewelry or a car are not deductible. But any capital gains resulting from such sales are fully taxable.
Beware of the “wash sale” rule. A “wash sale” typically occurs when an individual sells a security at a loss and then buys the same or a substantially identical security within 30 days before or after the sale. Any individual (except a dealer in stock or securities) who incurs a wash sale in the ordinary course of his or her business) cannot deduct the capital loss on his or her current year tax return. The amount of the disallowed loss is added to the cost basis of the repurchased security. For more information on “wash sales” please download from www.irs.gov IRS Publication 550 (Investment Income and Expenses).

Beware of “Buying a Dividend”

At this time of year, those Investors who intend to invest significant amounts of money in open-end (mutual) funds should check with the fund in find out whether the fund intends to distribute dividends and capital gains to their shareholders before year end. Many mutual funds distribute dividends and capital gains to their shareholders in December. The dividends and capital gains are considered taxable income to fund shareholders. If an individual invested in the fund shortly before the fund “record date,” the individual will qualify to receive the dividend/capital gain distribution and owe tax on the distribution. Also, as a result of the dividend/capital gain distribution, the share price of the fund (net asset value) will decrease. Consequently, the individual will owe tax on an investment that has immediately decreased in value. That is why tax professionals recommend to potential fund investors to find out when (what date) a mutual fund is considering a fund distribution and to postpone investing in the fund until after the “record date.” Receiving a fund distribution and paying tax on the distribution with an immediate drop in the mutual fund share price (net asset value) is called “buying a dividend.”

Tax-Favored Ways to Donate

Those investors who own appreciated stock (stock owned for more than a year) may want to consider donating the stock to a qualified charity. That allows those investors who itemize on their federal income tax returns (they file IRS Schedule A) to deduct the fair market value of the stock shares. They will not owe capital gain tax on the increased value of the stock shares and qualify for a charitable tax deduction. Investors who are considering stock donations should check with their tax advisors to get additional information about IRS rules concerning stock donations to qualified charities.

Another technique to save on taxes is with a qualified charitable distribution (QCD). With a QCD, an individual who is at least 70.5 years old can transfer as much as $100,000 a year from an IRA directly to a charity. The distribution and transfer of IRA funds to a qualified charity is not a taxable event. Also, a QCD can count toward the annual required minimum distribution (RMD) for IRA owners who have reached their required beginning date (age 70.5, 72, 73 or 75 depending in which year they were born) and therefore must take IRA RMDs every year. The result is tax savings because an RMD is fully taxable.

To qualify as a QCD, the donation must go directly from the IRA to a qualified charity. It is also important for the IRS owner to get a receipt or acknowledgement from the charity before one’s income tax returns are filed.

Edward A. Zurndorfer is a CERTIFIED FINANCIAL PLANNER™ professional, Chartered Life Underwriter, Chartered Financial Consultant, Chartered Federal Employee Benefits Consultant, Certified Employees Benefits Specialist and IRS Enrolled Agent in Silver Spring, MD. Tax planning, Federal employee benefits, retirement and insurance consulting services offered through EZ Accounting and Financial Services, and EZ Federal Benefits Seminars, located at 833 Bromley Street - Suite A, Silver Spring, MD 20902-3019 and telephone number 301-681-1652. Raymond James is not affiliated with and does not endorse the opinions or services of Edward A. Zurndorfer or EZ Accounting and Financial Services. The information has been obtained from sources considered to be reliable, but we do not guarantee that the foregoing material is accurate or complete. While we are familiar with the tax provisions of the issues presented herein, as Financial Advisors of RJFS, we are not qualified to render advice on tax or legal matters. You should discuss tax or legal matters with the appropriate professional.