RMDs, Venmo Reporting and Other Tax Issues to Watch Now: Jeff Levine

The end of each year brings many tax planning opportunities for financial advisors and their clients, and according to Jeff Levine, Kitces.com’s lead financial planning nerd and Buckingham Wealth Partners’ chief planning officer, late 2023 is no exception.

Speaking during a tax-focused webinar a few days ahead of Thanksgiving, Levine said there was a lot for financial advisors and their clients to be grateful for this year, even with some big lingering challenges in the markets and questions about what 2024 may bring. Inflation, while high, has slowed, and retired investors can now reliably source higher-yielding income portfolios with less risk.

As Levine noted, some tax planning considerations apply each year, from taking the correct required minimum distributions to ensuring proper withholdings on earned income and investment returns. However, there are also unique items to consider in any given calendar year that depend on recent market movements, anticipated government actions and individual clients needs.

According to Levine, the end of 2023 represents a particularly active time when it comes to tax mitigation considerations, due in no small part to the friendlier markets and to anticipated changes in tax laws that will take effect with the sunsetting of key provisions of the Tax Cuts and Jobs Act at the end of 2025.

Unless Congress takes action in the interim, this means clients have about two years to consider, study and enact various estate planning techniques that may either be reduced or entirely eliminated come 2026. Add these considerations to the normal yearly burden of tax management and the coming 12 to 24 months will undoubtedly be a “tax crunch time,” Levine warned.

Year-End Roth Conversions

As Levine emphasized, by this time in the year, an advisor should be able to reasonably estimate most clients’ adjusted gross income and taxable income for 2023.

This means advisors and their clients can now begin to make a reliable call as to whether 2023 represents a low marginal rate year for a given individual or couple, which in turn allows the advisor to assess the attractiveness of Roth conversions. Speaking generally, Roth conversions will be attractive in years when a client has lower earned income and can therefore pay the lowest potential rate on assets being converted.

Ideally, Levine said, a client will have cash on hand to pay the tax on the conversion without having to liquidate any investments, but there are also times when it may still make sense to convert and pay the taxes with the proceeds.

As Levine pointed out, a Roth conversion strategy can have many benefits for the original account owner during life, but many clients also overlook the potential upside for account beneficiaries after the original account owner’s death.

As in prior years, the final quarter of 2023 represents a great time for advisors to engage their clients in these deeper planning conversations, Levine suggested.

Tax Loss Harvesting

According to Levine, over the past several years, the provision of tax-loss harvesting services to advisory clients has become “table stakes.”

As such, he warned advisors on the line that, if they are not already engaged in some level of fairly sophisticated tax-loss harvesting, they are falling behind the industry standard.

While loss-harvesting actions can be most powerful during years with bigger market losses, advisors with the right approach can still help to significantly reduce their clients’ tax burdens in mixed market years such as 2023. Doing so, Levine said, often involves proactively harvesting interim losses throughout the year, including in November and December.

“Keep an eye on year-end capital gains distributions,” Levine recommended. “Also, watch out for wash sales, and consider locking in any crypto losses.”

Levine also recommended that advisors and clients carefully evaluate the potential to make tax-efficient bond swaps, but they must be mindful of the tax rules when buying bonds with a market discount.

Medicare Open Enrollment

As Levine noted, on a nationwide basis, the average monthly premium for Medicare Part D prescription drug coverage is set to decrease slightly in 2024, and the small reprieve is due to a variety of factors including key policy changes made as part of the Inflation Reduction Act.

This will be welcomed news for many retirees who are living on a fixed income, especially given the relatively modest 3.2% Social Security cost-of-living adjustment set for 2024, but research shows the average decline in Part D premiums actually masks a dramatic increase anticipated in several states with sizable retiree populations, namely California, Florida, New York, Pennsylvania and Texas.