2023 Year-End Planning Opportunities

Make your final tax saving moves before december 31ST

It’s crazy how fast time flies – It’s already approaching the end of 2023! While tax and financial planning should take place all year long, here are several actionable strategies to consider before year-end deadlines while taking into account your cross-border situation: your Canadian Investments integrated with your US investments. Plan a meeting with Steele Wealth Management coordinated with your tax professional to examine nuances and changes that could impact your typical year-end planning. This edition of Wealth Without Borders examines tax and financial planning moves to help prepare you for the upcoming tax season if you are obligated to file a US tax return. For year-end tax and financial planning for your Canadian return look here.

Mind your RMDs

Be thoughtful about Required Minimum Distributions (RMDs) to ensure that you comply with the rules. For a full discussion of the rules look here.

Investors who reach a certain age are required to take annual RMDs from their IRAs. You’ll face a hefty 25% tax penalty on amounts not withdrawn from your IRA to meet the RMD, so be sure to speak with Steele Wealth Management to ensure you’ve met your obligations.

• Timeline for RMD start ages

• Your first RMD can be delayed until April 1 of the year after you are required to start the RMDs. If you delay, however, you must also take your second RMD in the same tax year. This can inflate your income, which may affect your tax bracket. Check with Steele Wealth Management to determine what is applicable and best for you.
• Subsequent RMDs must be taken no later than December 31 of each calendar year.
• You can always withdraw more that the required minimum from the IRA. So, be mindful of how taking a distribution will impact your taxable income or tax bracket. If you are in a low tax bracket, discuss with Steele Wealth Management about taking an additional strategic distribution at that lower tax rate.
• Consider whether you should be mindfully drawing down your IRA to avoid the complex process of transferring you IRA to your beneficiaries at death. For a full discussion of this issue look here.

To harvest or not to harvest

Evaluate whether you could benefit from tax-loss harvesting, which is selling an investment with an unrealized loss to offset realized gains. If your capital losses exceed your capital gains, your excess losses up to $3,000 (single or married filing jointly) can be used to offset ordinary income. Any additional losses can be carried forward to future years. Talk with us to examine the following subtleties when aiming to decrease your tax bill:

• Short-term gains are taxed at a higher marginal rate; aim to reduce those first.
• Don’t disrupt your long-term investment strategy when harvesting losses.
• Be aware of “wash sale” rules that affect new purchases before and after the sale of a security. If you sell a security at a loss but purchase another “substantially identical” security (within 30 days before or after the sale date) the IRS likely will consider that a wash sale and disallow the loss deduction. The IRS will look at all your accounts, such as 401(k), IRA, and non-registered accounts when determining if a wash sale occurred.

LOCK IN YOUR GIFT AND GENERATION-SKIPPING TRANSFER TAX EXEMPTION

Consider locking in all or part of your currently available U.S. gift and generation-skipping transfer tax exemption. The $12,920,000 USD (2023) base exclusion amount is scheduled to return to $5,000,000 USD as of 2026 (indexed to inflation). Do not miss the opportunity to use the current exemption if you expect your estate to be worth more than the reduced exemption when you die. Lifetime gifts will reduce your estate tax exemption in effect at the time of your death.

Gifts you give to adult children are not subject to Canadian tax attribution rules but may trigger Canadian capital gains if you give assets that have increased in value from your Canadian cost. See a discussion of cost base tracking here.

CONSIDER GIFTING OWNERSHIP OF YOUR PRINCIPAL RESIDENCE

Consider gifting ownership of your principal residence to your non-U.S. spouse to avoid U.S. capital gains tax on the actual sale of your home. U.S. citizens can only exclude up to $250,000 USD of capital gain from U.S. income tax, unlike in Canada which provides an unlimited capital gains exemption for a designated principal residence. For a full discussion of the Principal Residence Rules look here. Use your remaining gift exemption to reduce any U.S. gift tax on the transaction.

Manage your income and deductions

Those at or near the next tax bracket should pay close attention to anything that might increase taxable income and may need to plan to reduce taxable income before the end of the year. Determine if it makes sense to accelerate deductions or defer income, potentially allowing you to minimize your current tax liability. Evaluate your income sources such as earned income, corporate bonds, municipal bonds, and qualified dividends to help reduce the overall tax impact. Evaluate your income considering the tax rules from both sides of the border.

Evaluate life changes

Important life events can have financial implications and should be discussed with Steele Wealth Management and your tax advisor. Bring us up to speed on major life changes and ask how they may affect your year-end planning.

Give thought to your family members’ life changes as well as your own – job changes, births, deaths, weddings, and divorces, for example, can all necessitate changes – and consider updating your estate documents accordingly.

Next steps

Consider these actionable items as you prepare for the upcoming tax season and to make the most of year-end financial planning strategies. Take the time now to talk to Steele Wealth Management to identify areas of your plan that may need adjusting to continue to meet your evolving life vision and your cross-border financial plan.