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Focusing On Fundamentals: Three Tax Strategies For 2023

Steve Baxley

22 March 2023

With March typically being the month for financial year-end tax filing, and the potential for legislative tax changes never far from mind, this article explores several tax strategies that high net worth individuals and families might want to consider. The article comes from Steve Baxley, managing director, head of tax and financial planning, at Bessemer Trust. The editors are pleased to share these views and invite responses. The usual editorial disclaimers apply. Email

With the next major set of tax law changes not slated until the end of 2025 when the individual tax provisions from the Tax Cuts and Jobs Act expire, taxpayers find themselves in a relatively static environment. Tax planning is generally a much more intuitive process when higher rates are on the horizon or deductions are set to be suspended or eliminated. 

The lack of significant changes may leave clients asking, "What tax moves can I make now to ensure significant future benefits?" The answer is simple: focus on the fundamentals – the blocking and tackling of tax planning. If applied consistently, these three tax planning strategies can reap long-term economic value. 

Roth IRA conversion
Roth IRAs offer a series of tax benefits. For example, all appreciation and income earned in the accounts is tax free, and all distributions are excluded from income. Compared with traditional IRAs whose required minimum distributions apply starting at age 72 and distributions are treated as ordinary income and subject to tax, Roth IRAs are generally exempt from RMDs, providing greater financial control. Clients might consider Roth IRA conversions to capitalize on these benefits, particularly when their associated tax cost can be reduced or eliminated. 

Depressed market levels also make conversions timely since the account owner must include taxable income in the same year in the value of the traditional IRA assets on the date of conversion to a Roth IRA. Taxpayers can most effectively reduce their tax cost by either:

-- Converting in a tax year where a large charitable contribution is planned, or
-- Disposing of investments with suspended passive activity losses.

For clients planning major gifts to an alma mater or foundation, charitable deductions are a useful way to reduce the tax cost involved by offsetting income recognized on the conversion. On the other hand, suspended passive activity losses become allowable on disposition and can be used to offset the ordinary income tied to the Roth conversion.

Backdoor Roth conversions 
Taxpayers might pause at the sound of “backdoor Roth conversions,” but, if they have no existing traditional IRAs, this is an effective strategy to add to a Roth IRA balance. To bypass the income limits on the direct funding of Roth IRAs, taxpayers with earned income can set up and fund a non-deductible IRA, and then subsequently convert the account into a Roth. Since this is a non-deductible IRA with no appreciation, there is no tax cost on the conversion.  

The benefits of a backdoor Roth conversion can be twofold, yielding:

-- tax-free income and distributions with no RMDs for owner and spousal beneficiary, and
-- tax-free distributions for non-spouse beneficiaries.

Case in point, the maximum contribution is $7,500 per year . If a married couple each contribute the maximum – $15,000 in total – to a Roth IRA every year for 15 years beginning at age 50, their Roth IRAs will total nearly $1.2 million at age 80.

Tax loss harvesting
Market dips may cause concern for short-term investment performance, but they are opportune for tax loss harvesting to reduce current-year tax liability on capital gains. 

Taxpayers should start off by recognizing losses within a portfolio to offset current year realized taxable gains. Special attention should be paid to short-term gains which are subject to a combined federal and net investment income rate that can be as high as 40.8 per cent. Additionally, losses from cryptocurrency investments can be used to offset other portfolio gains.

Though an effective strategy, tax loss harvesting is not a one-size-fits-all approach for portfolios, and clients should work carefully with advisors when exiting and re-initiating positions in substantially identical securities. Further, the wash sale rule preempts the recognition of losses where substantially identical securities are purchased 30 days prior to or following the date of sale.

Strategies today to play the long game
When it comes to tax planning, the absence of near-term tax law changes might leave taxpayers unsure of how to maximize the current environment to set themselves up for future economic success. Experienced tax planning professionals can help clients navigate the current landscape by focusing on the fundamentals to align their tax strategies with their financial goals.

Like most long-term investment strategies, these techniques will not yield significant tax benefits overnight, but if consistently applied annually, they can garner substantial economic value over time.