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A Smaller Tax Bill in 2024 Starts in 2023

Taking a step back to review the twists and turns of 2023 can help you optimize next year’s return.

Between back-to-school, football and basketball seasons and holiday planning, fall is an already busy time of year. It’s also important to make time for year-end tax planning with your Baird Financial Advisor – after all, there’s a lot that can happen in 12 months that can have a major impact on your taxes and finances.

Did you change jobs or careers?

A career change will likely have an impact on your tax bill for the year. For example, a severance package or a payout on accrued vacation days needs to be reported as taxable income. (Note that severance pay is considered “supplemental wages,” which will have a different level of withholding than regular wages.) Unemployment benefits are taxable, but a rollover of a company retirement plan to a new plan or an IRA is tax-free.

Did you retire?

While retirement is often a reason to celebrate, its impact on taxes can be confusing and requires careful planning. For example, Roth IRA distributions are typically tax-free (assuming certain requirements are met), while those from a traditional IRA are likely fully taxable, and Social Security falls somewhere in-between. If you’re age 73 or older, it also pays to ensure you’ve met all your retirement account distribution requirements.

Are you or a loved one pursuing an education?

A college education can bring with it many benefits – including some that can provide a tax break. Eligible college students can qualify for the American Opportunity or Lifelong Learning tax credits, and you may be able to deduct up to $2,500 of student loan interest you paid. While early distributions from an IRA trigger a 10% penalty, that penalty can be waived if they’re applied to qualified higher education expenses.

Did you sell or transfer a business?

If goes without saying that selling a business can have a major impact on your taxes. If you sold your business, was it an asset sale (where they buyer purchased the company’s assets) or a stock sale (where the buyer purchased the company stock)? Did you receive cash up front, on an installment basis, or did you roll the proceeds into a tax-free exchange? Are you transferring ownership to the next generation in your family? Answers to these and many more questions can help determine the tax impacts of the transaction.

Has your family changed?

Every family unit evolves over the course of a lifetime, and each important change can bring with it significant tax considerations. Did you or someone in your family get married? Was there a divorce or separation, or a death in the family? Do you have a new child or grandchild? Any major change to the family unit can have an impact on your taxes now and in the future.

Did you move?

Each state has its own unique set of taxes, and moving from one state to another can really add complexity. The decision of where and even when you moved can also affect the tax cost of selling an investment or taking a retirement distribution. Even outside of sales and income tax, if you have equity compensation as part of your work, you might find your stock options getting taxed differently. Buying and especially selling a house can also play a role.

Did you suffer property damage from a natural disaster?

From floods in California to a record-breaking arctic blast in New England, the U.S. has already endured 15 weather-related disasters in 2023 that resulted in more than $1 billion in losses each. If you or your business suffered uninsured or unreimbursed disaster-related losses in a federally declared disaster area, you may be eligible for filing and payment relief.

Did you experience an unexpected inflow or outflow of money?

Even if your personal life didn’t experience a significant change this past year, maybe your financial life did. Any big change in your finances (such as receiving an inheritance or winning the lottery) could affect the best way to prepare next year’s returns.

While year-end tax planning can be a very valuable exercise, it’s worth remembering that this kind of strategizing can and should happen year-round: While some events like winning the lottery aren’t ones you can anticipate, if you’re anticipating a new grandchild or a well-deserved retirement in the new year, it might be prudent to start considering their tax ramifications early. From tax return reviews to collaboration with one of our in-house tax specialists, your Baird Financial Advisor can be a great tax-planning partner.


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