When my brother taught me how to play pickleball, little did I know he was making up his own rules as we went along. I quickly learned I needed to take lessons from a pro (not my brother!) to play in pickleball tournaments. Because, of course, to score points and help you win in pickleball, you need to know the rules. It's the same with tax planning. As the end of the year approaches, if you take the time now to learn the rules, you may discover opportunities to help save on your taxes.
Five tax-aware strategies to consider now.
1. Make charitable donations now to get a 2023 tax deduction or consider "bunching" gifts to climb over the standard deduction.
Do you itemize your taxes? If yes, you may be able to reduce your taxable income through charitable deductions if you are eligible. Let's dig into the rules.
For 2023, the standard deduction is $13,850 for single filers and $27,700 for married couples filing jointly. But what if you are very close—but not touching—the standard deduction? There is a strategy you can consider: bunching your 2023 and 2024 charitable donations together in 2023 to climb above the standard deduction. Then, you could itemize your deductions on your 2023 tax return and take the standard deduction next year. Keep in mind, your contributions have different limitations based on your adjusted gross income (AGI), the type of charity you are giving to, and the type of asset you are donating. See IRS publication 526.
Scoring points: The bunching strategy may produce a larger total tax deduction over two years versus two years of standard deductions. Just like in pickleball, that's a nice get.
Timely tip: Remember, if you send your donation by check, it needs to be postmarked by Dec. 31. If you charge the donation on your credit card, you can get the deduction for this year and not have to pay for it until your credit card bill arrives next year.
Explore if bunching contributions make sense for you with Schwab Charitable's Bunching and Tax Savings Calculator.
2. Harvest your investment losses.
While you are reviewing your portfolio, consider if your current asset allocations still align with your long-term goals. If you discover losses in a taxable account, you could use those losses to offset any realized capital gains for 2023. If appropriate, you can always repurchase the investments, but be sure to do it at a later date and avoid the wash sale rule.
To set this strategy into motion, tally up your potential losses, then sell out of losing positions that no longer make sense to hold. You can use those losses to offset any realized capital gains. If you still have losses left over, you can offset up to $3,000 of ordinary income annually and carry forward any remaining losses to be utilized in subsequent years.
3. Be strategic with your annual exclusion gifts.
One of the keys to success in doubles pickleball is strong communication with your partner. The same could be said of your gifting strategy. Annual exclusion gifting is a common way to help your estate pass on assets tax-free.
Here are the basics: You can give any number of people up to $17,000 in 2023 without triggering a taxable gift, according to the IRS. That number climbs to $34,000 for married couples. The IRS calls these amounts the "annual gift tax exclusion," which simply means if you give that amount or less you generally don't need to report it to the IRS. But be aware that a married couple "gift splitting" does require the filing of a Gift Tax Return (709), regardless of the amount. However, there are other tax aware strategies you can consider. With both taxes and pickleball it can pay to play smarter rather than harder.
- Give stock that has increased in value to family members in a low tax bracket. Here's an example of how this could help save on taxes: If you have a stock that has significantly appreciated in value and are in the highest tax bracket, you would be subject to a 23.8% federal capital gains rate upon sale. If you gift that same stock to a family member who is in the lowest capital gains tax rate, they may be able to sell that same stock at a 0% federal capital gains rate.
- Open a custodial Roth IRA account for minors. Consider funding a custodial Roth IRA for grandchildren if they have a part-time or a summer job. Instead of giving them cash, gifting in this way allows them to take advantage of years of tax-free compound growth.
- Make educational and medical payments directly to the institution. Want to help someone with tuition costs (from pre-school to grad school and certain other educational organizations) or help pay medical expenses? Payments made directly for tuition to qualifying educational institutions or for qualifying medical expenses to medical institutions on behalf of your intended beneficiary don't count towards your annual exclusion amount (or against your lifetime estate tax exclusion).
4. Review your investment location with an eye toward taxes.
In pickleball, you don't want to land a shot in the kitchen (a no-volley zone). In investing, "location" can matter when it comes to taxes. For example, there are different tax implications depending on which types of investment accounts you choose.
- With a taxable brokerage account, you are taxed on interest, dividends, capital gains, or distributions from mutual funds as they occur.
- In a tax-deferred retirement account, like an individual retirement account (IRA) or 401(k), you’ll generally pay taxes when you eventually withdraw the assets.
- In a Roth IRA, earnings and distributions are tax-free as long as you are over age 59 ½ and the account is at least five years old.
Depending on your long-term investment goals and investment preferences, you could benefit from a tax standpoint by investing in more actively-managed mutual funds in your retirement accounts and by investing in exchange traded funds (ETFs)—which are generally more tax-efficient because they tend not to distribute a lot of capital gains—in your taxable account.
Consider this: There's a saying: Don't let the tax tail wag the investment dog. While this move may be right for you, it reminds us not to make moves to minimize taxes in your portfolio unless it aligns with your long-term investment strategy.
5. Contribute to or max out your retirement plan if you are able.
Contributing to a retirement account can lower adjusted gross income and taxable income. In 2023, the 401(k) contribution limit stands at $22,500, and if you are 50 or older, you can save an additional $7,500 in catch-up contributions for a total of $30,000. The IRA contribution limit totals $6,500 in 2023, with a catch-up contribution of an additional $1,000 for those 50 or over. And if your plan allows and you believe your income tax rates may be higher in retirement, you may also want to consider the Roth option. It doesn't have to be one or the other—you can make contributions to both as long as the total contribution does not exceed the overall contribution limit. Be aware, however, that Roth accounts are funded with after-tax dollars, so those contributions won't lower AGI.
Get started now.
As you review your financial picture, consider these five ideas to help you prepare to serve, dink, and rally your way to a successful tax season. To all my fellow picklers: Opa!
The information provided here is for general informational purposes only and should not be considered an individualized recommendation or personalized investment advice. The investment strategies mentioned here may not be suitable for everyone. Each investor needs to review an investment strategy for his or her own particular situation before making any investment decision. All expressions of opinion are subject to change without notice in reaction to shifting market conditions. Data contained herein from third-party providers is obtained from what are considered reliable sources. However, its accuracy, completeness, or reliability cannot be guaranteed. Examples provided are for illustrative purposes only and not intended to be reflective of results you can expect to achieve.
Schwab does not provide tax advice. Clients should consult a professional tax advisor for their tax advice needs.
Investing involves risk, including loss of principal.1223-35ZL