Prio Wealth’s 10 Tips for Tax Planning in 2023

Written by Prio Wealth’s Director of Financial Planning, Bill Dion, CFP®
and Prio Wealth Relationship Manager, Robert Devinney, CFP®

Two things dominated the financial and economic landscape in the United States in 2022 – down markets and inflation. Paired together, these did damage to every family’s ability to save, spend and sleep across the globe. While we are working to mitigate these two horrors in 2023, they do provide some silver linings pertaining to your tax liability for last year.

Inflation adjustments are made every year, but given the level of inflation endured in 2022, some of those adjustments are much larger than in years past. Tax brackets are significantly larger in 2023 for income and capital gains rates. The annual gift-tax exemption has risen by $1,000 to $17,000 in 2023. Also, with the largest dollar and percentage increase to date, employees can contribute up to $22,500 to their employer-sponsored retirement plans in 2023 – this is $2,000 (or 9.75%) more than 2022.

It may come as a relief that many confusing changes brought about by the pandemic do not apply in 2023. Unfortunately, this means that the additional deductions on cash donations for standard filers, among other things, have gone away. On a positive note, the Internal Revenue Service has significantly reduced their backlog built up from 2020 until now so the atmosphere in tax season 2023 is fairly calm.

Additional Tax Planning Tips:

1. Remote workers may need to file and pay taxes to more than one state.
2. Pay attention to questions related to cryptocurrency transactions. Not only did the crypto landscape in 2022 make taxes more complex for investors, but the IRS and Congress continue to implement enforcement efforts for 2023 and beyond.
3. The increased estate and tax exemptions created by the Tax Cuts and Jobs Act in 2017 are set to expire at the end of 2025.

Planning consideration: Talk to your wealth advisor and/or estate attorney when implementing an estate plan to discuss if it it will need adjusting after 2025.

4. For most filers, it makes more sense to take the standard deduction rather than itemizing. The standard deduction for single filers in 2022 is $12,950 ($25,900 for married couples filing jointly). Taxpayers aged 65 and older receive an additional standard deduction to these amounts.
5. The child and dependent tax credit expansions put forth in 2021 have ended. The credit reverts to $2,000 per child in 2022 and 2023.
6. For the charitably inclined, utilize Donor Advised Funds combined with a gift bunching strategy and if over age 70.5, consider using IRA’s to make Qualified Charitable Distributions (QCDs).
7. The new age for beginning Required Minimum Distributions (RMD’s) from tax deferred accounts is 73 and the life expectancy tables have been updated to reflect longer life expectancies.

Planning consideration: The Secure Act 2.0 made even further changes to how retirement accounts are treated when inherited. Talk to your wealth advisor about how these changes may impact your heirs and your legacy goals. Congress is still in the process of detailing the intricacies regarding many of the new regulations.

8. Maximize estate reduction strategies by fully utilizing the annual gift tax exclusions (increased to $17,000 in 2023) and by paying tuition expenses directly to schools to provide support more than the annual exclusion amounts.
9. If older than 59.5, consider drawing down tax deferred retirement assets to supplement income needs because non-spouse inheritors of tax-qualified assets may suffer a tax disadvantage in the future by being forced to draw down the entire amount within 10 years of inheritance.
10. Consider making strategic Roth conversions to lessen the taxable liability inherited by your heirs.

It is important to note that all these strategies should be considered within the context of your priorities, overall financial plan, and your specific financial situation. If you would like more information on how these issues may apply to you specifically, please reach out to your Prio Wealth Advisor. Our goal is to guide our clients and help them navigate the financial issues that may impact them and their family. Please feel welcome to introduce us to like-minded friends and family members that may benefit from our services.