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The 10 Most Important End-of-Year Investment & Tax Strategies for 2023

December 21, 2023

By 
Roy Satterthwaite
,
|
Farther Investment Committee
By 
By Farther Committee

As we near the end of 2023 and start looking towards the new year, there are several essential financial steps that we can take to help ensure 2024 is a successful year. From completing your year-end tax planning and tactical investment changes to understanding how the U.S. Tax Cut & Jobs Act, set to expire soon, might impact you, it’s more important now than ever to stay up to date in order to save money and position yourself for financial growth in the new year.

To help, we have compiled, in conjunction with the Farther Investment Committee, an end-of-year checklist with key action items that include 10 of the most necessary year-end measures to consider, creating a one-stop-shop for where to find advice for financial success in the new year.

#1 Tax-Loss Harvesting

Tax-loss harvesting is a strategy for investors that allows them to reduce capital gains taxes owed from selling profitable investments. By taking advantage of the most recent market dip, this could be an ideal time to sell holdings at a loss in order to offset holdings held at a gain. These losses can then be used to offset capital gains incurred in 2023 or can even be carried forward to help offset the future sale of appreciated assets.

When executing the tax-loss harvesting strategy, it’s critical to adhere to the rules set out by the Internal Revenue Service (IRS). If these rules are not navigated correctly, any attempted tax savings may be disqualified from an asset sale. 

There are additional factors to consider with tax-loss harvesting. Real estate gains may also be factored into your strategy. If you face a large capital gain on the sale of your home or rental property in 2023, selling assets with a loss can help reduce that liability. Additionally, cryptocurrencies can also be used to offset losses along with your other assets.

  • Work with your advisor to review your unrealized capital gains/losses to identify tax-advantaged opportunities.
  • Create a current year and/or future year capital loss offset trade strategy.
  • If possible, leverage tax-loss harvesting technology from your financial advisor.

#2 Adjust Your Portfolio Based on Current Market Conditions 

Even if you don’t have losses to offset with gains, you don’t want to be a set-it-and-forget-it investor. Instead, you should understand current market conditions and use this knowledge to make tactical changes to your long-term portfolio allocations.

  • Consult with your financial advisor to understand current capital market conditions.
  • Make tactical trades now, and then make final loss harvest trades by December.

#3 Make Sure Your Cash Is Highest Yielding & Safe

Many cash savings yields are at all-time highs, but that doesn’t necessarily mean that your holdings are secure, especially during economic uncertainty. It’s important to be educated on the variety of cash and cash equivalent investment instruments with associated governmental protection policies. You can read more here

  • Identify the highest yielding money market or certificate of deposits (CDs) that is backed by the U.S. government.
  • Allocate CDs across accounts as needed to maintain FDIC insurance protection.

#4 Offset Surprise Capital Gains from Your Mutual Funds

Unlike exchange-traded funds (ETFs), the managers of mutual funds often make last-minute, end-of-year changes to put their funds in the most attractive position possible. However, this can create a problem, as capital gains that these managers incur are passed on to you, proportionately to your individual holdings—resulting in unwanted gains that drive up your taxable income.

To combat this, investors should work with their advisors to get insights on these coming distributions, typically through the use of online tools. Investors can offset these gains by taking losses (see the tax-loss harvesting section above). Remember, ETFs don’t have this problem and are much more tax efficient.

  • Work with your advisor to research each of your mutual fund’s income impacts for your 2023 capital gains.
  • If possible, incorporate these gains into a tax-loss harvesting strategy.

#5 Rebalance Your Portfolio

Rebalancing is the process of buying or selling investments in order to get back to your original asset allocation target, allowing you to re-establish your target risk/reward profile while the underlying investments shift over time. Generally, it is best practice to rebalance your portfolio when the asset allocation drifts away from your target by more than 5%. There is no better time to rebalance your portfolio than the end of the year, when you can take advantage of the tax-loss harvesting opportunities.

  • Check with your investment provider to understand if they automatically rebalance your account.
  • Reset your target asset allocation.

#6 Optimize Tax-Deferred Contributions 

While contributions to your individual retirement account (IRA) can be made until the year’s tax filing deadline, April 15, your 401(k) contributions must be made by the end of the calendar year. 

For those of you who have already maxed out your 401(k), considering a Mega-Backdoor-Roth might be an attractive option. This approach is for individuals whose incomes are too high to be eligible to contribute to an IRA. When converted, you reap the benefits of a Roth IRA, where distributions are not taxed, and the account is not subject to required minimum distributions (RMD).

  • Your employer may take a couple of pay periods to implement your requested changes, so now is the time to check your HR department’s deadline to allow for any changes to take effect.
  • Check on your year-to-date 401(k) contributions now and make changes with your employer before the last payroll cycle in order to meet your goal at year’s end.

#7 Maximize Your Charitable Donations

Right now, you can deduct up to 60% of your adjusted gross income via charitable donations. After the Tax Cuts and Jobs Act expires in 2025, this is scheduled to go back down to 50%. Additional policies may limit you to 20%, 30%, or 50%, depending on the type of contribution and the organization. Remember to speak with your financial advisor, who can coordinate with your tax preparer to formulate a strategy for you. Learn more about charitable giving here.

  • Determine whether you will be able to itemize deductions and ready your charitable donation plan accordingly.

#8 Fund 529 (Education) Plans

A 529 plan is a tax-advantaged savings account designed for the beneficiary’s education expenses. In 2023, the annual exclusion amount is $17,000 for a single taxpayer or $32,000 for a married filing jointly taxpayer. Donors can also elect to make five years’ worth of annual exclusion amounts in a single year’s contribution, up to $80,000 for a single taxpayer or $160,000 for a married filing jointly taxpayer. The Tax Cut & Jobs Act, soon to expire, allows for front loading or gift contributions of up to $175,000, for married, meaning that now is a good time to revisit tuition planning before the end of the year.

  • Check your 529 contributions to date to reach your target contribution amount.

#9 Manage Your Tax Bracket (and Watch Out for AMT)

The end of the year is the time to manage your tax bracket, both ordinary income and capital gains. Although you can’t manage your employer’s payroll, there are several considerations to defer income to next year. 

Tracking whether you will be subject to the alternative minimum tax (AMT) is essential. Generally, if you have high capital gains in proportion to ordinary income, or if you exercised company stock options, you may be subject to this alternative tax schedule. 

For capital gains, there are three standard federal tax brackets: 0%, 15%, or 20% tax rates. When executing on the investment strategies outlined above, you want to carefully navigate the timing of your asset sales in order to stay below a specific capital gains tax threshold.

Additionally, if you are a contract-based worker or gig economy freelancer, you may be able to defer your billings. Some companies might also allow you to defer your bonuses to next year. However, these measures only make sense if you are trying to stay in a lower tax bracket. 

Work with your advisor and tax preparer to minimize taxes in these 3 primary categories:

  • Ordinary income (by deferring income, if possible)
  • Capital Gains (by staying below the 20% bracket if possible)
  • AMT (by monitoring AMT preference items)

#10 Update Your Estate Plan, Gifting Amounts, and Distributions

This is also a good time to evaluate if your overall estate plan is on target and optimized for you and your beneficiaries. Reviewing your standard checklist of readiness – including the titling of your accounts, preparing a will, or establishing a trust – are good steps. For high-net-worth individuals, you might also want to ensure you are meeting trust distribution obligations.

You can also make and declare your gifts to minimize your estate tax liability at this time. This is important, especially as the estate tax is higher than the ordinary income tax rate. You may also opt to pay the medical and education expenses of your beneficiaries, which are excluded from the gift tax exemption. 

  • Conduct an estate plan checklist with your financial advisor.
  • Team up with your attorney and financial advisor to update your estate plan.

Take Advantage of Year’s End

While the above list represents the most common strategies to optimize your investments, while minimizing your tax liability, there are many other considerations depending on your specific situation. Whether you’re assessing company-granted stock options or nearing retirement and considering your IRA contributions, everyone’s year-end assessment will be different. It is why working with a financial planner can ensure that you’re set up for success into the new year and beyond. Don’t procrastinate this planning, the best time to start is now.

Roy Satterthwaite, SVP Client Manager at Farther

Roy Satterthwaite

,

Managing Director
Farther Investment Committee
With over 35 years of investing experience, Roy is at Farther to provide game-changing financial planning and investment advice to our clients.Roy began his career working for his father, who was one of the nation’s first Certified Financial Planners. He then went on to build a successful career in finance, research, and technology industries – including holding several senior operating officer roles at both public and private companies. A registered FINRA advisor, Roy earned an MBA from the Columbia University Graduate School of Business and a Certificate of Financial Planning from the University of California, Berkeley.Roy is an avid skier and a lifetime (but significantly above-par) golfer. He has been married for over 30 years and has 3 children.
With over 35 years of investing experience, Roy is at Farther to provide game-changing financial planning and investment advice to our clients.Roy began his career working for his father, who was one of the nation’s first Certified Financial Planners. He then went on to build a successful career in finance, research, and technology industries – including holding several senior operating officer roles at both public and private companies. A registered FINRA advisor, Roy earned an MBA from the Columbia University Graduate School of Business and a Certificate of Financial Planning from the University of California, Berkeley.Roy is an avid skier and a lifetime (but significantly above-par) golfer. He has been married for over 30 years and has 3 children.
Roy Satterthwaite, SVP Client Manager at Farther

With over 35 years of investing experience, Roy is at Farther to provide game-changing financial planning and investment advice to our clients.Roy began his career working for his father, who was one of the nation’s first Certified Financial Planners. He then went on to build a successful career in finance, research, and technology industries – including holding several senior operating officer roles at both public and private companies. A registered FINRA advisor, Roy earned an MBA from the Columbia University Graduate School of Business and a Certificate of Financial Planning from the University of California, Berkeley.Roy is an avid skier and a lifetime (but significantly above-par) golfer. He has been married for over 30 years and has 3 children.

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