Here are some year-end tax hacks you should know about before closing out 2023!
‘Tis the season to make New Year’s tax resolutions! According to experts, it’s those who plan ahead who tend to get ahead, so make sure you won’t miss out on some valuable tax planning strategies.
Whether you’re still struggling to get off the ground, rebounding from recent losses, or having a good year, you may be able to save a lot on your taxes if you make the right moves before the end of the year. And who doesn’t want to save some money these days when inflation has made everything so expensive?
We’re bumping up against the tail end of 2023, but there’s still enough time to set up for a successful upcoming tax season. Here are five year-end tax hacks you should try!
1. Consider tax-loss harvesting
One upside of a declining market is that it gives an investor the chance to sell a losing bond or stock and then use that capital loss to offset tax gains. This offset thing can be done either in the current year or a future year. If you’re active in the investment world, this is one of the best year-end tax hacks you should put into practice!
According to finance experts, tax losses can be carried forward indefinitely, and you can use them to offset gains on the sale of a bond or stock, a business, a home, or a capital gain from a distribution from a pooled investment (actively managed). Harvested tax losses can even be offset by state income taxes on up to $3,000 of ordinary income.
As with any year-end tax hacks you’ll find in this list, there are rules that establish the conditions you have to meet in order to tax-loss harvest. The best thing you can do is consult with a financial or tax adviser to ensure you don’t run afoul of IRS guidelines.
Moreover, tax-loss harvesting involves some risks and tax implications, so it’s paramount to review all terms of consent in addition to asking for professional help before putting into practice any year-end tax hacks.
2. Max out employer retirement plan contributions
Finance experts strongly advise not only to save for the future but also to ensure you max out as much as you can on your employer’s retirement plan contributions. This is one of the easiest and best year-end tax hacks that will help you set up for the next year.
For many workers, access to a 401(k) or similar retirement plan is one of the easiest ways to save for the golden years while also taking a break from current- or future-year taxes. Most plans allow for tax-deferred contributions, and there are some that also allow for after-tax contributions via a Roth account. The earnings on the former accumulate on a tax-deferred basis, while the latter are tax-free.
It’s important to note that withdrawals from a Roth account are tax-free only for those over the age of 59½ and who have held the account for at least five years. If you meet these two conditions, finance experts say this is one of the best year-end tax hacks you should take advantage of. If you don’t meet the two requirements, you’ll owe taxes on withdrawals and a potential penalty.
This being said, contribute at least enough to get an employer’s match if one is offered, and ensure you don’t leave any free money on the table. In addition, you can keep contributing up to $22,500 for 2023, or as much as $30,000 for those age 50 or older.
Workers who haven’t reached that maximum limit—and who want to—may be able to increase contribution amounts in the last few weeks of the calendar year.
3. Maximize charitable giving tax opportunities
Many investors are honorably happy to support a favored cause, but not all consider the tax-planning benefits of charitable contributions. There are several year-end tax hacks you can try while supporting a good cause.
For example, a qualified charitable distribution (QCD), which can be made from some IRA accounts, can lower a tax bill by reducing taxable income or by eliminating or reducing a required minimum distribution (RMD). The maximum annual QCD limit is $100,000, and the distribution can’t also be claimed as an itemized charitable deduction on an income tax return.
Another charitable-related trick is the donation of appreciated securities, which aren’t subject to a capital gains tax when received by an eligible charity.
Last but not least on year-end tax hacks that involve charitable giving is the establishment of a donor-advised fund, which can slash an investor’s tax liability now but also let a donor make donation decisions—for instance, where to donate and how much—in a future year.
Read on to discover other year-end tax hacks!
4. Plan for tax efficiency
The purchase of low-cost, low-turnover exchange-traded funds (ETFs) and mutual funds is probably the most straightforward strategy for tax-efficient investing, but there are a bunch of other methods that can benefit an investor, depending on one’s particular goals and needs.
The tax advantages offered by municipal bonds in the current yield environment can be tempting for those even in mid-range tax brackets, as can the tactical placement of certain asset types into specific investment vehicles to benefit from the tax treatment of each.
The income from municipal bonds may be exempt from federal tax, but you can still owe taxes on capital gains if they are redeemed or traded. Moreover, for some, a part of the fund’s income may be subject to local and state taxes, as well as the federal alternative minimum tax.
This being said, asset location decisions aren’t always straightforward, so you may want to speak with a financial adviser to help simplify the decision-making process and put into practice those year-end tax hacks that work for you.
5. Make gifts for your family
The principles behind making donations to charities also apply to making gifts to family members and other loved ones. According to experts, you should sell underperforming taxable investments and collect the resulting tax-saving capital losses. Then offer the cash proceeds to loved ones.
Conversely, give appreciated investments directly to relatives. They will most likely pay a lower tax rate than you when they sell the shares.
An individual can gift money to relatives or other loved ones up to $17,000 per year without incurring a gift tax. The threshold will go up to $18,000 in 2024. For married couples, the amount doubles to $34,000 per year.
Financial experts say they have seen this exclusion used to fund a child’s or grandchild’s college savings plan or to transfer wealth over time. They also point out that family gifting is a use-it-or-lose-it tactic; if the annual exclusion isn’t used in a particular year, it’s reset for the next year.
Some of these year-end tax hacks are straightforward and easy to put into practice, while others require more planning and some help from the experts. A financial adviser can help you identify which tax planning opportunities, be they an impending retirement, the sale of a business, or a sizable charitable donation, are present and build a roadmap to create the most efficient tax strategy for you—both for the coming year and for the long term.
By the way, if you want to get to the 0% tax bracket before you retire, this guide can help you do that.
If you liked our article on year-end tax hacks, you may also want to read Bills-Savvy Seniors: Strategies to Keep More Money in Your Pocket.