As 2023 draws to a close, there’s a window of opportunity to make strategic moves that could significantly reduce your tax bill or increase your refund. With the right planning, you can optimize your financial situation before ringing in the new year. Let’s explore some expert-endorsed strategies.
1. Maximize Your 401(k) Contributions
One of the most effective ways to lower your taxable income is by boosting your 401(k) contributions. For 2023, the contribution limit is $22,500, with an additional $7,500 allowed for those aged 50 and over. Increasing your contributions can decrease your adjusted gross income, potentially putting you in a lower tax bracket.
Interestingly, a 2023 Vanguard report revealed that only 15% of participants maxed out their 401(k) contributions in 2022. If you haven’t reached your limit yet, consider adjusting your contributions, especially if you’re expecting a year-end bonus. This move could not only reduce your taxable income but also enhance your retirement savings.
2. ‘Bunching’ Charitable Contributions
With the increased standard deduction under the Tax Cuts and Jobs Act, fewer filers are itemizing deductions. For 2023, the standard deduction is $13,850 for single filers and $27,700 for married couples filing jointly. A strategic approach to surpass these thresholds and itemize deductions is ‘bunching.’
‘Bunching’ involves accelerating deductions, like charitable donations, into one tax year. This strategy is particularly effective for contributions to donor-advised funds, which allow for an immediate tax deduction and the ability to distribute funds to charities over time.
3. Utilizing Tax Brackets Wisely
Understanding your tax bracket is crucial for year-end tax planning. If you’re considering actions that could increase your income, such as a partial Roth IRA conversion or taking distributions from an inherited IRA, ensure these don’t push you into a higher tax bracket. Running a tax projection can help determine how much additional income you can afford within your current bracket.
4. Extending Tax Strategies into the New Year
Some tax-saving strategies can spill over into early 2024, offering flexibility if you’re short on funds:
- IRA Contributions: You have until the tax filing deadline to make contributions to your IRA for 2023. You can contribute up to $6,500 ($7,500 for those 50 and older), potentially qualifying for a tax deduction.
- Health Savings Account (HSA) Contributions: HSAs offer a triple tax advantage: deductible contributions, tax-free growth, and tax-free withdrawals for qualified medical expenses. The contribution limits for 2023 are $3,850 for individuals and $7,750 for family plans.
Get Organized: The Key to Stress-Free Tax Planning
Certified financial planner Akeiva Ellis advises starting your tax document organization now. Waiting until April can lead to unnecessary stress and missed opportunities. By being proactive, you ensure that you’re taking full advantage of all available tax-saving strategies.
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