Tax & Financial Planning

Strategic moves you can make before year-end 2023

By Elizabeth Shabaker, CFP, CDC

Versant Capital Management’s holistic wealth planning approach incorporates investment management, income tax planning, estate and transfer planning, asset protection, business succession planning, and family-dynamics considerations such as education of heirs and beneficiaries to become financially fluent and knowledgeable about wealth stewardship expectations and opportunities.

With year-end fast approaching, there are several things for consideration on the income tax and estate tax planning fronts.

Tax Legislation to Note
Although no significant tax legislation has been enacted in 2023, several pieces of tax legislation from 2022 will impact 2023 income and gift tax returns. The 2017 Tax Cuts and Jobs Act (TCJA) lowered individual federal tax rates for many Americans. It raised the lifetime estate and gift tax exemption (currently $12.92 million per person, and for 2024, it is estimated to be $13.6 million). These higher exemptions can potentially lower federal estate tax burdens for high-net-worth families. These changes to the tax code are temporary and effective through the end of 2025. Unless new legislation is passed, those tax rates and exemptions will revert to pre-TCJA tax provisions on January 1, 2026.


Following are year-end tax and gifting strategies to consider before 2023 comes to a close. While many strategies may be effective in helping you manage your tax burden, they are not all-inclusive or a destination in and of themselves. Please consult your Versant Wealth Advisor to help create a strategic plan tailored to your needs and goals. We will work directly with you and your legal and tax advisors to determine how the strategies may apply to your situation.

Gift And Estate Tax Planning
The annual gift tax exclusion is $17,000 for 2023. Each individual may transfer up to $17,000 per person per year to any number of beneficiaries (family or nonfamily) without paying gift tax or using up any available applicable lifetime exemption.

The estate tax rate is 40% for any amount exceeding $12.92 million (or exceeding $25.84 million for married U.S. residents or citizens). One concern of the pending elimination of the individual tax breaks in the Tax Cuts and Jobs Act after 2025 is the drop of the unified credit from $12.92 million per individual for 2023 to a figure around $7 million, depending on inflation adjustments, in 2026.

Taxpayers concerned about the drop in the lifetime and GST exemptions may consider making sizable gifts in 2023, 2024, and 2025. The IRS has assured taxpayers such gifts made under the current unified credit will not be clawed back into the estate if the unified credit is eventually reduced.

New or Expanded Tax Credits
The Inflation Reduction Act provided new or enhanced tax credits and deductions for individuals and businesses. For individuals, two tax credits for energy-efficient home improvements were enhanced and extended.

The Energy Efficient Home Improvement Credit changed from a $500 lifetime credit to a $1,200 annual credit, making that credit available again for many homeowners for whom it had otherwise been used up.

It also expanded the Clean Vehicle Credit and created the new Previously Owned Clean Vehicle Credit for electric vehicles. However, the sourcing rules and assembly rules for these credits mean that many electric vehicles will not qualify or will qualify for only a partial credit unless assembly plants are located in North America and battery components are sourced from the U.S. or countries with which the U.S. has a free-trade agreement. More used clean vehicles may qualify for the previously owned credit rather than the new vehicle credit.

Maximize Retirement Plan Contributions
Maximizing retirement plan contributions remains a good year-end tax strategy. Combined limits for 401(k) or 403(b) deferral contributions are $22,500 for those younger than age 50 and $30,000 for those 50 and older. These contributions must be made by December 31, 2023.

Contribution limits for Traditional and Roth IRAs are $6,500 for those younger than age 50 and $7,500 for those 50 and older. 2023 IRA and Roth IRA contributions may be made until April 15, 2024.

Self-employed individuals or small business owners can also take advantage of retirement plans. With a SEP IRA, you can contribute up to 25% of your salary or $66,000 in 2023, whichever is less. You have until the 2023 filing deadline, including extensions, to make the contribution. There are some additional plans for self-employed individuals, and your Wealth Advisor can help determine which plan is best for you.

Roth Conversions
One way to benefit from tax-advantaged growth potential and possible tax-free distributions may be to convert all or some portion of your Traditional IRA to a Roth IRA. At the time of conversion, you will pay the appropriate taxes due, but the benefits of tax-free income in retirement may justify the conversion.

Converting allows you to lock in the current tax rates and save more on an after-tax equivalent basis. Additionally, earnings would be distributed tax-free if the Roth IRA has been open for longer than five years and you are at least age 59½, you are disabled, or you are using the first-time homebuyer exception. It can also provide estate planning tax efficiencies for you and your beneficiaries.

Required Minimum Distributions from Retirement Accounts
SECURE 2.0, enacted as part of the year-end Appropriations Act in December 2022, made many changes to tax-advantaged retirement plans, including extending the age at which you are required to take minimum distributions (RMDs) to age 73 for 2023 and reducing the penalties for failure to make required minimum distributions from 50% to 25%.

An IRS position that the 10-year distribution period for inherited IRAs must be made ratably over the 10-year period surprised many taxpayers and tax practitioners. The IRS has responded by waiving penalties for failure to make required minimum distributions from inherited IRAs in 2021, 2022, and 2023 for IRA owners who died in 2020, 2021, or 2022.

Roth IRAs do not require withdrawals until after the death of the owner. However, designated Roth accounts in a 401(k) or 403(b) plan are subject to the RMD rules for 2022 and 2023. For 2024 and later years, RMDs are no longer required from designated Roth accounts.

Paying Estimated Taxes from IRA Required Minimum Distributions
Some people need help remembering to pay quarterly estimated taxes. One way to address this is to have all or part of your RMD go to federal and state estimated taxes at year-end. The IRS views the payment as if it was made throughout the year, so you avoid an underpayment penalty. So, if your RMD can cover your estimated tax payments, you can get extra deferral in your portfolio and not make your quarterly tax payments until December.

Health Savings Accounts (HSAs)
HSAs are available to participants enrolled in high-deductible health insurance plans. At the federal level, contributions to HSAs are not subject to income tax. Limits for HSA contributions for 2023 are $3,850 for individual coverage and $7,750 for family coverage.  A $1,000 catch-up contribution is allowed for those 55 or older. Contributions to HSAs can no longer be made after enrolling in Medicare (eligibility for Medicare begins at age 65).

Distributions are tax-free if they are used for qualified medical expenses. However, a significant advantage of an HSA is that there are no annual distribution requirements, time limits on use, or required account termination. These factors theoretically allow the HSA to grow in perpetuity. This can make an HSA a powerful retirement-planning tool. Investors who can afford to do so can contribute during their working years, with current medical expenses paid out of pocket.

The contributions are invested and allowed to grow until retirement when the HSA is used to cover qualified medical expenses and is distributed tax-free. This strategy maximizes your deductible medical expenses during working years and provides a source of triple-tax-free income during retirement.

Charitable Contributions
The deduction of charitable contributions by those taking the standard deduction has expired, along with the enhanced deduction of itemized charitable contributions. However, considering charitable contributions for the year remains a viable tax strategy for those who itemize. This includes bunching strategies in which charitable contributions are bunched into every other year to exceed the standard deduction in the year that charitable deductions are claimed. Donor-advised funds can assist in this strategy by making it easier to spread out the actual contribution to a particular charity.

Qualified charitable distributions from IRAs are available for taxpayers aged 70½ or older, up to $100,000 annually. (RMDs do not have to start until 73.) This can also satisfy any required minimum distributions noted above. This option removes the distribution from adjusted gross income. A new law change also permits a one-time distribution of up to $50,000 of the qualified charitable distribution to be paid directly from your IRA to certain split-interest entities, such as a charitable remainder trust or charitable annuity, that qualify under the new rule.

Congress recognized that doubling the standard deduction under the Tax Cuts and Jobs Act of 2017 would effectively eliminate the ability of many taxpayers to obtain a benefit for their charitable contributions, potentially causing many taxpayers to donate less. To counteract this, a change was made to increase the adjusted gross income (AGI) limitation for cash contributions to a public charity from 50% to 60%.

Although the AGI limitation for cash contributions was increased, it is also important to consider donating appreciated property. Generally, if you donate appreciated property that has been held for over one year, you are eligible to deduct the fair market value without paying income tax on the unrealized gain. However, you can only deduct up to 30% of your AGI when making these gifts of long-term capital gains property (to a public charity). Avoiding a tax payment on the unrealized gain, combined with the charitable contribution deduction, may produce a better tax result than donating cash. A typical example would be donating stock held long term that has increased in value since its purchase.

State Charitable Tax Credits
Many states offer tax benefits for contributions to education, low-income residents, chronically ill or disabled children, foster children, and the military. For Arizona taxpayers, the State has several tax credits to take advantage of through April 15, 2024, while still being applied to your 2023 tax return:

  • Private School Tuition organizations up to $1,308 for married filing jointly (MFJ) and $655 for all other filers.
  • PLUS “Switcher” Tax Credit Program allows an additional $1,301 MFJ and $652 for all other filers after maximizing the Private School Tuition Credit.
  • Public Schools up to $400 MFJ and $200 for all other filers.
  • Charities that aid the working poor up to $841 MFJ and $421 for all other filers.
  • Qualifying Foster Care charitable organizations up to $1,051 MFJ and $526 for all other filers.
  • The Arizona Military Family Relief Fund is available if made by December 31, 2023, for up to $400 MFJ and $200 for all other filers. Contributions to this fund are capped at $1 million. The Fund historically reaches its $1M cap before the end of the calendar year, so donors are encouraged to contribute as soon as possible.
  • S Corporation Private School Tuition Credits passed through to its individual shareholders
    • An S corporation that qualifies for the corporate private school tuition credit may elect to pass through the credits to its individual shareholders if it contributes at least $5,000 to a qualified school tuition organization. These credits may be claimed in addition to the two individual private school tuition credits and are not subject to limitations that apply to the individual private school tuition credits.

A list of Arizona’s tax credits and the qualifying charitable organizations can be found on the Arizona Department of Revenue website.

1099s from Venmo and Other Third-Party Payment Processors
Third-party payment processors are now required to provide 1099-Ks to individuals with more than $600 worth of transactions with the processor for the year. The processor may not know whether the transaction is a personal transaction or a transaction for goods or services that is taxable. You are advised to try to notify the processor that a transaction is a personal one.

If 1099-Ks are received for personal items, you are advised to report the incorrect amount on the 1099-Ks and make an adjustment to net it to zero. You may also receive a Form 1099-Misc from the seller and a 1099-K from the third-party processor for the same transaction, and you should be careful not to double-count the amounts on the tax return.

Tax Loss (Or Gain) Harvesting
Tax loss harvesting remains a viable strategy for year-end tax planning. It’s never fun when the stock market goes down, but there is a small silver lining: harvesting capital losses. Tax-loss harvesting is selling a security that has experienced a loss and using the proceeds to buy a similar security that maintains your market exposure. This loss now becomes an asset that can offset current or future gains in the portfolio. Versant Capital Management continuously monitors opportunities to harvest losses for all our clients.

Conversely, people in the lowest tax brackets should consider harvesting long-term capital gains because they may be eligible for the 0% long-term capital gains rate (based on federal taxable income). As a result, you can sell the security and immediately repurchase it to maintain your market exposure. You’ve now reset your cost basis without triggering any taxable gains!

You do have to be alert to the “wash sale” rules to avoid loss of the current capital loss deduction. A wash sale occurs when a security is sold at a loss, and the same security — or a substantially identical security — is purchased 30 days before or 30 days after the sale date. When a wash sale occurs, the loss recognized from the transaction is disallowed and cannot be used to offset other gains. Instead, the disallowed loss amount will be added to the basis of the repurchased securities. When investing in mutual funds, you should also be alert to the record date for the fund for year-end capital gain distributions to avoid buying into the fund just before the record date. Versant Capital Management pays very close attention to this for all our clients.

Digital Assets
The IRS continues to focus on the underreporting of digital asset income. The IRS has success gaining access to information on crypto transactions through third-party summonses, so you should take increasing care in your response to the digital asset question on your tax return and to their reporting of transactions in digital assets. The IRS takes the position that digital assets are property and not currency, despite some countries adopting cryptocurrency as an official currency.

Rollovers from 529s to Roth IRAs
While it is not effective until January 1, 2024, it is worth noting that the SECURE 2.0 added a provision allowing tax and penalty-free rollovers from 529 accounts to Roth IRAs under certain circumstances.

Beneficiaries of 529 college savings accounts are permitted to roll over up to $35,000 throughout their lifetime from a 529 account in their name to their Roth IRA if the 529 account has been in existence more than 15 years, and the amount to be rolled over has been held in the account for at least five years. These rollovers would be subject to annual Roth IRA contribution limits.

Year-end Planning Equals Fewer Surprises
Whether working toward a tax-optimized retirement or getting answers to your tax and wealth planning questions, proper planning can help you minimize your tax bill and position you for greater success.

Elizabeth Shabaker, CFP, CDC, is Co-CEO of Versant Capital Management. Her focus spans diverse financial areas, including investments, estate planning, tax strategy, philanthropy, family governance, and next-generation education. Liz’s expertise in family governance and next-generation planning helps people unlock the full potential of their wealth. Through a meticulous discovery process, she delves into family aspirations and concerns, uncovering short- and long-term objectives.

DISCLOSURES: For complete information on your tax situation, you should consult a qualified tax advisor. While Versant Capital Management doesn’t offer tax advice, we are familiar with certain tax situations that our clients face regularly. Disclosure: Any tax-related material contained within this document is subject to the following disclaimer required pursuant to IRS Circular 230: Any tax information contained in this communication (including any attachments) is not intended to be used and cannot be used for purposes of (i) avoiding penalties imposed under the United States Internal Revenue Code or (ii) promoting marketing or recommending to another person any tax-related matter.