Introduction:
As we approach the end of the year, the urgency to make strategic financial decisions is heightened, especially with looming changes in tax laws and the continued impact of inflation on our wallets. The Tax Cuts and Jobs Act provisions are set to sunset after 2025, potentially increasing tax rates. To navigate this complex landscape and optimize your financial position, we’ve compiled 12 last-minute tax tips for 2023. These tips will not only help trim your tax bill for the current year but also position you for success in the years to come.
- Contribute to Tax-Advantaged Accounts: Start by maximizing your contributions to tax-advantaged accounts. While you have until April 15, 2024, to contribute to an IRA, workplace retirement plans like 401(k)s and 403(b)s require contributions by December 31, 2023. Leverage traditional contributions to reduce taxable income and explore the benefits of health savings accounts (HSAs) for additional tax advantages.
- Turn Investment Losses into Tax Gains: Take advantage of market volatility by engaging in tax-loss harvesting. By strategically selling investments at a loss and offsetting gains and income, you can minimize your tax liability. However, be mindful of wash sale rules, especially considering potential changes in cryptocurrency regulations.
- Consider a Roth Conversion: Explore a Roth conversion before year-end. With many investments experiencing downturns, converting to a Roth IRA now allows you to convert more shares for the same potential tax bill. Plus, considering the anticipated tax rate increase in 2026, this strategy can be advantageous.
- Consider Itemizing: Evaluate whether itemizing deductions makes sense for your situation. With five main categories of itemizable deductions, such as medical expenses, home mortgage interest, and charitable contributions, itemizing could result in greater savings if these deductions exceed the standard deduction.
- Trim College Costs with Education Breaks: Take advantage of education-related tax breaks, such as the American Opportunity Tax Credit and deductions for contributions to 529 college savings accounts. Prepaying education expenses and maximizing contributions can provide significant tax benefits.
- Defer Some Income: If you have freelance or gig income, consider delaying billing until the next year to lower your taxable income for the current year. Collaborate with your accountant to create a tailored income deferral plan.
Tax-Smart Giving Strategies:
- Bunch Charitable Contributions: Implement the bunching strategy by concentrating charitable deductions in a single year, allowing you to claim the standard deduction in alternating years. Utilize donor-advised funds for added flexibility in spreading your contributions.
- Donate Appreciated Assets: Itemizers can benefit from donating appreciated assets to a qualified public charity, enabling you to deduct the fair market value without incurring capital gains tax. Be aware of the 30% AGI limitation.
- Cash and Property Contributions: Deduct cash contributions and property donations (e.g., furniture, electronics) up to 60% of your AGI. Ensure proper documentation, such as a qualified appraisal, for deductions over $5,000.
- Gift Smartly to Loved Ones: Take advantage of the annual gift exclusion by gifting up to $17,000 per recipient (increasing to $18,000 in 2024). While not tax-deductible, this strategy can reduce the value of your estate without utilizing your lifetime gift and estate tax exemption.
Tax-Savvy RMD Strategies:
- Don’t Forget RMDs: If you’re 73 or older, ensure you take your required minimum distribution (RMD) from retirement accounts by December 31. Missing this deadline could result in a substantial penalty. Consider careful planning to reduce taxes associated with withdrawals.
- Consider Charitable RMDs: For those not in immediate need of RMD funds, explore making qualified charitable contributions (QCDs) directly from your IRA, up to $100,000 per individual. This not only satisfies your RMD but is not subject to federal taxes and is available even if you don’t itemize.
Looking Ahead to 2024:
While we’ve provided valuable tips for a tax-smart 2023, it’s essential to acknowledge that each individual’s tax situation is unique. Inflation adjustments and changes in tax brackets for 2024 necessitate flexibility in your financial plan. To construct a personalized plan aligned with your goals, consult with your tax advisor or a financial professional. As the tax landscape evolves, staying informed and proactive is key to financial success.
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