Another year is beginning and it creates a new set of financial and tax planning strategies.

Plan for your required minimum distribution (RMD)

The new tax law just changed the first year of your required minimum distribution from age 72 to 73. If you are turning 72 next year, you will now be able to wait until 2024 to start taking your first distribution.

If you are still working, this is a nice tax reprieve since you can now delay taking the extra income for another year. If you were relying on the distribution to meet living expenses, now may be a good time to re-evaluate where to get the extra cash. If you have a taxable account, it may make sense to take funds from there even if you have taxable gains. Gains are taxed at capital gains rates vs. RMDs, which are taxed at ordinary income rates.

Cashflow projections

Now is a great time to evaluate what you spent in 2022 and plan for the next 12 months. Normally you would want to set aside enough cash to last you for 12 months plus any large purchase needs in 2023, such as renovations or a new car.

Since the market is still down, setting aside cash every 2-3 months, rather than all at once, may make sense, but still plan for 12 months. Look at your income from social security, which is going up 8.7%, and how this additional cash might affect your cash needs. If you and your spouse are receiving $60K in social security now, you can expect an additional $5K in the pot this year. Once you set aside cash, make sure cash is earning at least 3%. 

Compile tax documents

Start collecting your 1099s, which are usually available by the end of February. K1s may take a while to generate and may cause you to file an extension. You will also want to keep track of your Health Savings Account (HSA) contributions and withdrawals. If you have a solo 401k, you will want to make sure you file a 5500 by August 1, 2023.

If you have charitable contributions, make sure you keep the receipts. If you have made Qualified Charitable Distributions from your IRA (QCDs), make sure your accountant subtracts those amounts from your IRA distribution since your 1099 does not separate these donations from income. 

If your deductions are higher than the standard deduction, collect relevant bills such as property tax, after-tax charitable donations, and mortgage interest information. 

If you have high medical bills and your out-of-pocket costs are higher than 7.5%, put together a list with supporting documentation. The IRS allows all taxpayers to deduct their qualified unreimbursed medical expenses that exceed 7.5% of their adjusted gross income. You will need to itemize your deductions on Schedule A in order to include your medical expenses instead of taking the standard deduction.

Review beneficiaries

Check your beneficiaries on your accounts and determine if any estate planning documents need to be updated based on any changes that took place during the year. 

Review estimated tax payments

You don’t want to create any tax penalties for additional taxes owed from 2022. For example, if you did not withhold on RMDs in 2022 and still owe the taxes, or if you did a large Roth conversion, you may want to settle with the IRS sooner rather than later. If you sold a home or had a large income year, you should make sure you have the funds to pay the taxes handy.

Gifting

If you are single and gifted to any one individual over $16k in 2022 ($32K joint) annual exclusion, you will need to file a gift return. For example, if you gave your child $100k towards the purchase of a home, you will need to file a return to account for an $84K gift.