9 Year-End Tax Strategies

As we enter the last couple months of the year, it is a good time to revisit your tax planning and make sure you are taking advantage of the available opportunities. These could be moves to save taxes now or in the future. Here are nine strategies to consider before the year ends.

 

Reduce Taxable Income This Year

For those looking to reduce the income taxes they pay this year, these strategies may be worth considering:

  • Maximizing Workplace Retirement Plan Contributions – For those with a 401k or 403b plan (among others), you can contribute up to $22,500 in 2023 to a traditional (pre-tax) workplace retirement plan ($30,000 for those 50 and over). These contributions reduce your taxable income during the year which they are made.
  • Funding Your Health Savings Account (HSA) – These accounts are considered the most tax-friendly for those looking to save for healthcare expenses. The funds go in tax-free, grow tax-free, and can be taken out tax-free when used for eligible healthcare expenses. For those in a high-deductible plan, up to $3,850 can be contributed by individuals and up to $7,750 can be contributed by families in 2023. These contributions are deductible for federal income tax purposes.
  • Contributing to a 529 Plan – Certain states offer tax incentives for contributing to their 529 plans for education savings. For example, the state of Michigan allows taxpayers to deduct the amount of contributions they make when they calculate their state tax bill – up to $5,000 for single filers and up to $10,000 for joint filers.
  • Tax-Loss Harvesting – If you have a taxable account with positions at a loss and are in a high tax bracket, it may make sense to sell those positions to realize the losses. Losses can offset gains elsewhere and up to $3,000 of losses per year may be used to reduce your taxable income.

 

Pull Income Forward

If you are in a lower tax bracket this year than you expect to be in the future, you may want to consider ways to pull income forward. This could be because you are early in your career or you just retired and haven’t started taking social security yet. These strategies include:

  • Roth Conversions – By converting your traditional tax-deferred retirement accounts to Roth accounts, you can pay taxes on the conversion amount now and allow then allow the money to grow tax-free in a Roth account. Assuming certain rules are met, any withdrawals from the Roth accounts will be tax-free as well.
  • Realizing Gains – If you have unrealized gains in your taxable portfolio and are in a low long-term capital gains tax bracket, it can make sense to sell the investment and realize the gain this year. The strategy is that you would be paying a lower tax rate in the current year than you would in the future. This is especially appealing for those in the 0% long-term capital gains tax bracket.

 

Set Up a Retirement Plan

For self-employed business owners, a workplace retirement plan can be used for building up tax-advantaged savings.

  • Opening a Solo 401K – The solo 401K account is one of our preferred options for self-employed workers who don’t have any employees (with an exception for those who employ their spouse). These plans are attractive due to their high contribution limit of $22,500 in 2023 ($30,000 if you’re 50 or older).

 

Take Advantage of Charitable Giving

For those who are charitably minded, there are tax benefits that can be realized by pursuing certain giving strategies. These include:

  • Qualified Charitable Distributions (QCD) – For those with traditional IRA accounts who want to make charitable contributions, QCDs can be a great option. A QCD is a direct transfer from your IRA account to a charity. The amount of the QCD is not included in your taxable income as long as certain requirements are met. Also, for those who have to pay required minimum distributions (RMD) , the QCD can be counted toward satisfying your RMD.
  • Stacking Contributions – With the increased standard deduction, many taxpayers don’t receive the same amount of tax benefit from their charitable gifts that they used to. One way to make the most of your donations from a tax perspective is to stack your contributions. In this strategy, you would do multiple years worth of donations for tax purposes in one calendar year to receive the most benefit from itemizing your deductions. Since many donors don’t want to just contribute to charities in one calendar year, a donor-advised fund may be a good option. By using a donor-advised fund, you can make the contribution for tax purposes during one year and then distribute the funds to charities over the next 5-10 years for example, allowing you to spread at the timing of the charitable grants.

 

Takeaways

As the year is winding down, it is a good time to review your tax planning and see if there are any moves to make before year-end. These strategies could save a person tens of thousands of dollars in taxes over their lifetime and for some the amount of savings is much greater. Every person’s situation is unique and there are many factors to consider as these options are evaluated. If you would like to talk with a financial planner about your tax strategy, please schedule a call with us here.

 

 

The information contained herein is intended to be used for educational purposes only and is not exhaustive. Diversification and/or any strategy that may be discussed does not guarantee against investment losses but are intended to help manage risk and return. If applicable, historical discussions and/or opinions are not predictive of future events. The content is presented in good faith and has been drawn from sources believed to be reliable. The content is not intended to be legal, tax or financial advice. Please consult a legal, tax or financial professional for information specific to your individual situation.

Advisory services offered through Financial Life Management, LLC – Doing Business As – SummitView Advisors, a Michigan registered investment adviser. The adviser may not transact business in states where it is not appropriately registered, excluded or exempted from registration. Information presented is for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any securities or investment advisory services. Investments involve risk and are not guaranteed. Be sure to consult with a qualified financial adviser and/or tax professional before implementing any strategy discussed herein.