Nell Graham Sale

November is the best month to look over what has happened with your income and expenses for the current year. This way, you have a month to make decisions about how you want to have the best income tax outcome for the year, as well as decisions about charitable choices you want to make. Most decisions that will be reported on your 2023 income tax return need to be implemented before December 31, 2023.

To begin with, you need to figure out if you will itemize your deductions for 2023 or take the standard deduction. The standard deduction for single or married people filing separately for 2023 is $13,850. If you are over age 65, that increases to $15,700. For married couples filing jointly, the standard deduction is $27,700, and you can add $1,500 for each member of the marriage who is over age 65. If you are filing as head of household, the standard deduction is $20,800, with an additional $1,500 if over age 65.

If you have deductions which add up to more than the standard deduction, which may include charitable gifts, mortgage interest payments, property taxes, state income taxes or sales taxes, and certain business, medical or moving expenses, you might want to itemize. By doing this planning in November, you can make changes in December to get the most favorable income tax result for 2023.

If you are over age 73 and have retirement plans, you are required to take a Required Minimum Distribution (RMD) from your retirement plans, which must be paid to you by the end of December 2023. This will be included in your taxable income. However, if you do not need it, and do not want to be taxed on it, you can direct the plan administrator of your Individual Retirement Account (IRA) to make Qualified Charitable Distributions (QCDs) to charities, up to $100,000 per year. These gifts to charities are not taxable as income to you nor are they deductible against your taxable income. So, converting RMD into a QCD avoids obtaining more taxable income and gives you the satisfaction of benefiting your favorite charities by the end of year.

In 2023, if you have an IRA and are over age 70 ½, you can make a lifetime charitable gift from the IRA up to $50,000 by funding a Charitable Gift Annuity (CGA) or a Charitable Remainder Trust (CRT). You can fund a CGA at a local community foundation or a private commercial charitable entity such as Vanguard or Fidelity. You name a charity to receive what is left at your death, and you receive taxable distributions (the annuity part), for the rest of your life. The CRT is similar, but it is a trust and requires a Trustee.

Whether or not you itemize for income tax purposes, you still might want to make some charitable gifts, but do not want to have to decide which ones and how much before the end of the year. You can create a Donor Advised Fund (DAF) at either a community foundation or through a commercial charitable entity such as Vanguard or Fidelity before the end of the year.  The minimum funding is commonly about $25,000, and rules may vary. You can then make charitable donations at any time in the future from the DAF, but the charitable deduction will count for the year that you made the donation to the DAF. 

Finally, if you are working, and funding a retirement plan with a portion of your salary payments, you need to make sure that you are funding the retirement plan with as much as you can afford up to the annual deductible amount. You are converting taxable dollars into investment dollars that will not be taxed to you until withdrawn. Additionally, you can fund either an IRA or a Roth IRA up to $6,500 this year. (This contribution can be made after 2023 but before April 15, 2024.) If you are over 50, whether you are working or not, you can fund an IRA or Roth IRA with $7,500. These contributions remove that amount from your taxable income.

Now is the time of year for you to review what has happened in 2023 so far and make an appointment with your accountant or tax preparer to make sure you are taking advantage of every opportunity to maximize good income tax and charitable planning.

As is always the case, this article is for your information and should not be considered as either legal or accounting advice for your particular circumstances.  I welcome any questions you might have.  Please send them to my attention at INFO@NWTO.us.