5 tax planning actions to take before year-end

With the end of the year in sight, now is the time to start assessing your 2023 tax obligations to see what, if anything, you might do to reduce your bill.

As a first step, ask your professional advisors for help estimating what you might owe. Then identify the tax planning strategies that best fit your personal circumstances.

The sooner you begin to take stock, the more time you will have to ensure your plans are in place by December 31.

Here are five planning ideas to help you get started.

1. First, develop a base case

As a first step, ask your tax advisor to prepare a pro forma 2023 tax return. This information will help you understand your current tax situation—and how that might change if you were to realize more income or incur additional deductions this year.  

Similarly, ask your J.P. Morgan team for a “tax summary” of year-to-date activity in your J.P. Morgan accounts to help with your tax estimates.¹

With this snapshot in hand, you can better assess whether or not it makes sense to implement tax planning strategies before year-end.²

2. Consider these tax-smart strategies

Harvest tax losses

Financial markets have rallied this year, and so you may be facing a steep tax bill for gains. However, you may be able to reduce the bill by harvesting losses before year-end.  Tax loss harvesting is a classic strategy that may reduce your tax liability.³

Harvesting losses requires you to sell an investment at a loss. You then can use this loss to offset either already-realized gains, or embedded gains that you can realize now or in the future.

If you still like the asset, you can buy it back—so long as you are careful not to violate the “wash sale rule.” This rule prevents you from taking a loss if you buy a security considered “substantially identical” within 30 days before or after the loss trade date.⁴

If you do not want to be out of the position for an entire month, you might consider “doubling up” on your position (i.e., if you buy the identical position at the current price), then wait more than 30 days before selling the original loss position. November 28 is the last day to do so and still be able to recognize the loss for 2023.

Of course, tax loss harvesting isn’t limited to year-end planning. Ideally, you would regularly review your portfolio for harvesting opportunities. Indeed, you might benefit from having an account that is specifically designed to consistently look for losses and take them when appropriate. For more information, see, How do tax smart strategies actually work.

Deduct charitable contributions

It is always advisable to try to time your charitable donations to ensure the associated deductions are effective in the intended tax year. Depending on what you plan to donate, it could take time to complete the transfer. Consult your financial institutions to understand estimated timelines to ensure your donations will be considered to have been made by the end of this year.

If you’re unsure which charity you want to support but would like the deduction for this year, consider donating to a donor-advised fund (DAF). Tax deductions for donations to DAFs are immediate, but the payout from the DAF to another charity does not have to be.⁵
  
Minimize estimated payments

The U.S. tax system is a “pay as you go” system, with most taxpayers paying taxes through regular withholding from their pay. However, many high-income earners must pay quarterly estimated taxes (generally by or around April 15, June 15, September 15, January 15) to avoid interest charges on the amount that is ultimately due April 15th of the next year.

The law allows estimated payments to be made on the basis of a “lesser of” calculation, so you can choose to pay either:

• 110% of the actual tax liability for the preceding year, or
• 90% of the estimated tax liability for the current year⁶

In a high-interest-rate environment, taxpayers expecting to owe much more in taxes in the current year than in a prior year may want to pay estimated taxes based on their tax liability for the preceding year,  and consider investing the difference in 100% principal-protected short-term fixed income to take advantage of higher interest rates.

3. Optimize compensation and benefits

Fund retirement

If you can contribute to a retirement account, we recommend doing so—up to the full dollar amount permissible. In 2023, the maximum annual amounts you can contribute to retirement accounts before year-end are:

• IRAs—$6,500. If you are 50 or older, it’s $7,500
• 401(k)s/403(b)s—$22,500. If you are 50 or older, it’s $30,000⁷

Converting assets from a traditional IRA to a Roth IRA may be a smart move if you:

• Think your future income tax rates may be higher
• Can afford to pay the taxes with cash from other sources
• Do not plan to leave IRA assets to charity
• Expect the IRA to last for a while

Take required minimum distributions

Be sure to take your required minimum distributions (RMDs) by year-end to avoid steep penalties.

If you have significant philanthropic objectives, remember that you can make a qualified charitable distribution (QCD) from your IRA directly to a public charity (not a DAF). The amount given will go toward satisfying your RMD.⁸

If you inherited an IRA after 2019, proposed Treasury Regulations, interpreting the SECURE Act, would require certain beneficiaries to take annual distributions over the 10-year period following inheritance instead of waiting to distribute the full account until the 10th year. IRS guidance issued in July 2023 extends the effective date of this proposal until at least 2024. We are awaiting final guidance to see whether the government will amend the proposed rules. However, with the uncertainty that remains about this topic, you should consult with your tax advisor to determine what to do given your particular situation.⁹

Defer compensation

If your employer allows you to defer your compensation, you must elect to defer your 2024 fixed salary and other non-performance-based compensation by December 31, 2023, if not earlier, as specified by your employer.

With a deferral, there is no income tax liability on either the compensation or its growth until you receive it, at which time, the payment will be taxed at the ordinary rates in effect. The tradeoff for electing this deferral is that you assume risk as a general creditor of the employer.

This decision, too, requires careful consideration of your expected current and future income tax rates.

Exercise stock options

If you are an executive, you may want to exercise some of your stock options in 2023. The important question is: Which to choose? Good candidates generally include those options that are:  

• Deep-in-the-money
• On high-dividend-paying stocks
• Near their expiry 

This year’s market volatility can make this decision more complicated, so ask your J.P. Morgan team for an “options breakeven” analysis.  

4. Make tax-wise gifts to your children

Use your lifetime exclusion amount now

Currently, an individual can transfer up to $12.92 million free of estate and gift taxes; for married couples, the tax-free transfer amount is $25.84 million.

These amounts—currently at an all-time high—are set to decrease after 2025 and to limit tax-free transfers to $5 million (inflation adjusted) for individuals and to $10 million for married couples.

If you have a taxable estate, the capacity and desire to gift, and all or part of your current lifetime gift and estate tax exclusion remains unused, think about acting soon to lock in the extra gifting potential.

Your J.P. Morgan team can help quantify your gifting capacity so you can transfer assets without jeopardizing your own future financial security . 

Put annual tax-free gifts to good use

Every year, U.S. taxpayers can take advantage of an “annual gift tax exclusion,” and give to as many individuals as they choose, and for whatever present use. In 2023, individual taxpayers can give up to $17,000 free of gift taxes. Married couples can give up to $34,000 tax-free.

The annual gift tax exclusion is a “use-it-or-lose-it” opportunity. If you do not make a gift this year, you cannot double up next year and treat half the gift as having been made in 2023.

Parents and grandparents often use their annual gift tax exclusions to fund 529 accounts, where the funds grow free of U.S. income and capital gains taxes. As long as the money is used for the account beneficiary’s qualified education expenses, no U.S. income or gift tax will be due on distributions.

5. Get professional advice

There are many ways to strengthen your financial health before year-end—especially if you get started now.

Speak with your tax advisor about which actions may be right for you.  Your J.P. Morgan team can work with you and your tax advisor to help identify tax planning actions that are best suited to your personal circumstances and long-term financial goals.

For more on year-end tax planning, see our comprehensive checklist, “Your 2023 Tax Guide.”

JPMorgan Chase & Co., its affiliates, and employees do not provide tax, legal or accounting advice. This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for tax, legal and accounting advice. You should consult your own tax, legal and accounting advisors before engaging in any financial transaction.​