As 2023 winds down, it’s the perfect time to look at your financial situation and make some smart moves to minimize your tax bill. With the right strategies, you can potentially save a significant amount on taxes, putting more money back into your pocket. Here are some key end-of-year tax minimization strategies to consider.
1. Maximize Retirement Contributions
One of the most straightforward ways to reduce your taxable income is by maximizing contributions to your retirement accounts. For 2023, you can contribute up to $20,500 to a 401(k) or similar workplace plan. If you’re 50 or older, you can make an additional catch-up contribution of $6,500.
In case you missed it, these contribution limits were increased for 2024.
Individual Retirement Accounts (IRAs)
The contribution limit for IRAs in 2023 is $6,000, with an additional $1,000 catch-up contribution for those 50 and older. Contributions to a traditional IRA are often tax-deductible, depending on your income and whether you or your spouse have a workplace retirement plan.
2. Consider a Roth Conversion
If you have a traditional IRA, consider converting it to a Roth IRA. While this move will increase your taxable income in the short term, it can save you money in the long run, especially if you expect to be in a higher tax bracket in retirement. Roth IRAs offer tax-free growth and withdrawals.
3. Harvest Tax Losses
If you have investments in a taxable account that have lost value, you can sell them to realize the losses. These losses can offset any capital gains you’ve realized during the year. If your losses exceed your gains, you can use up to $3,000 of excess loss to offset other income.
4. Bunch Charitable Contributions
Consider bunching your charitable contributions. This means combining multiple years’ worth of donations into one year. This strategy can be particularly effective if you itemize deductions. It allows you to surpass the standard deduction threshold and claim a larger charitable deduction in one tax year.
5. Make the Most of Medical Expenses
If you have significant medical expenses, you might be able to deduct them. For 2023, you can deduct unreimbursed medical expenses that exceed 7.5% of your adjusted gross income (AGI). If you’re close to this threshold, consider scheduling any necessary treatments or procedures before the year ends.
6. Use Flexible Spending Accounts (FSAs)
If you have a flexible spending account (FSA) for health care expenses, remember these are typically “use it or lose it” accounts. Check the balance and spend down these funds on eligible expenses before the year ends or before your grace period expires in early 2024.
7. Optimize Education Expenses
For those paying for college, make sure you’re taking advantage of education tax credits. The American Opportunity Tax Credit (AOTC) offers up to $2,500 per student for the first four years of college, while the Lifetime Learning Credit provides up to $2,000 per tax return.
8. Adjust Your Withholding
If you expect a large refund, consider adjusting your withholding. Getting a big refund means you’ve given the government an interest-free loan. Adjust your withholding to better match your tax liability and increase your take-home pay.
With interest rates higher than they have been in decades, there are safe ways to store that money and earn interest. Consider adjusting your withholding and using a high yield savings account to earn interest to store the difference.
9. Defer Income
If possible, consider deferring some of your income to the next year, especially if you expect to be in a lower tax bracket. This might mean delaying year-end bonuses or postponing freelance income.
10. Contribute to a Health Savings Account (HSA)
If you have a high-deductible health plan, contribute to an HSA. For 2023, individuals can contribute up to $3,650, and families can contribute up to $7,300. Contributions are tax-deductible, and withdrawals for qualified medical expenses are tax-free.
11. Consider Energy-Efficient Home Improvements
If you’ve made any energy-efficient improvements to your home, you may be eligible for certain tax credits. These credits can help offset some of the costs of installing energy-efficient systems. Some examples include new windows, water heaters, solar panels, and more.
12. Review Your Investment Portfolio
Take a close look at your investment portfolio. Are there ways to shift your investments to be more tax-efficient? For example, consider placing investments that generate taxable income in tax-deferred accounts.
End-of-year tax planning is an essential part of managing your finances. By taking steps now, you can reduce your tax liability and improve your financial situation heading into the new year. Remember, each person’s financial situation is unique, so it’s always a good idea to consult with a tax professional to tailor these strategies to