Year-End Tax Strategies

As the holiday season approaches, take some time to give yourself and your loved ones a year-end financial bonus. Implementing smart year-end tax strategies can help retain more of your income and reduce the amount owed on your federal and state tax returns come April. Essentially, it’s like giving yourself a raise. Here are some financial moves to consider before January 1.

Maximize Employer-Sponsored Retirement Contributions

Before year-end, maximize contributions to any employer-sponsored retirement plans, such as a traditional 401(k). For 2023, the current limit is $22,500; however, those aged 50 and above can contribute an additional $7,500, bringing the total to $30,000. These contributions reduce taxable income for the year, providing significant financial benefits. Note that if you choose a ROTH 401(k) instead of a traditional one, ROTH contributions are made with after-tax dollars and do not defer taxes. However, earnings from interest, dividends, or capital gains in ROTH accounts are tax-free.

Efficiently Handle Required Minimum Distributions (RMDs)

Individuals aged 73 and above must adhere to RMD requirements for retirement accounts. The SECURE 2.0 Act has adjusted the starting age for RMDs to 73 for 2023 and implemented more lenient penalty structures for missed distributions. While our previous blog covers RMD requirements in more detail, consulting a qualified financial advisor is strongly recommended to ensure optimal timing and minimize tax impacts related to RMDs.

Use Charitable Giving as a Strategic Tool

Embracing charity during the holiday season can also provide tangible tax benefits. Itemized deductions for charitable donations to qualified organizations can be up to 60% of your adjusted gross income (AGI). Consider donating appreciated long-term assets through donor-advised funds to deduct the full fair market value (up to 30% of AGI). For those aged 70.5 or older, Qualified Charitable Distributions (QCDs) allow direct donations of up to $100,000 from an IRA to charity, satisfying part of the RMD without additional tax burdens.

In addition to charitable donations, understanding the IRS gift and estate tax limits is crucial for individuals and families engaged in estate planning and wealth transfer strategies. For 2023, the annual gift tax exclusion allows up to $17,000 per person without triggering gift tax liability. Refer to our blog on 2023 and 2024 gifting limits for more details.

Capitalize on Tax-Loss Harvesting Opportunities

Market volatility can provide tax optimization opportunities through tax-loss harvesting. Strategically selling investments at a loss can offset other capital gains realized during the year, potentially reducing overall tax liability. However, be mindful of the wash sale rule, which disallows claiming a loss if you repurchase the same or substantially identical security within 30 days before or after the sale.

Proactive Planning for a Smooth Tax Season

Make a New Year’s resolution to prioritize tax planning and preparation for a smoother tax season in 2024. Gather all tax-related documents and consider hiring a skilled tax preparer. Anticipate any significant life changes in the coming year, such as a new job, marriage, retirement, or relocation, and incorporate these factors into your tax planning.

Seek Expert Advice for Customized Solutions

While these year-end tax strategies offer valuable optimization tools, it’s essential to recognize that each financial situation is unique. Consulting a qualified financial advisor or certified tax professional can tailor these strategies to fit your specific circumstances and maximize potential savings.

With all the activities during the holiday season, it’s easy to postpone financial and tax planning. Don’t wait until the new year—taking action today can significantly impact what you owe the government in April.