Year-End Tax Moves to Save Money

 As the year winds down so, too, does your opportunity to take proactive steps to reduce 2023 income tax due in April 2024 and, perhaps, taxes due in future years as well.  Below are some money-saving tax planning strategies to consider. Seek professional advice as needed.

Early RMD Withdrawals- The “financial gap years” between age 59½ and 73 (or 75 if born in 1960 or later) are when there are no longer penalties for withdrawals from tax-deferred accounts but required minimum distributions are not yet mandatory. Sometimes it makes sense to pay taxes voluntarily at a lower tax rate during gap years to save on taxes later at a higher tax rate.

 

Draft Tax Return- A draft tax return with “best estimates” of taxable income and tax write-offs is the first step in a year-end tax review. By early December 2023, income and tax withholding should be pretty predictable and tax-saving strategies taken so far (e.g., tax-deferred retirement plan contributions and charitable gifting) are already accounted for.

 

Year-to-Year Comparison- Once a draft 2023 tax return is prepared, compare it to 2022. Look for big changes in income and expenses that will affect taxes owed. Example: savers earned about 0.25% interest in 2022 vs. 4.5%+ with online banks and money market funds in 2023. On large account balances, this could result in a big difference of thousands of dollars of additional taxable income (e.g., $250,000 x .0025 = $625 versus $250,000 x .045 = $11,250).

 

Tax-Loss Harvesting- This is where investors proactively take a loss on the sale of securities to offset realized capital gains. If losses exceed gains, up to $3,000 can be claimed against other taxable income and any losses beyond that carried forward to future tax years. Securities held for a year and a day or longer are taxed at long-term capital gains rates (versus ordinary income rates for short-term gains) so it is important to review their holding period before selling.

 

Tax Bracket Planning- The objective is to control your marginal tax bracket to avoid paying taxes at a higher rate. For example, if you are near the top of the income range for the 12% tax bracket, you want to try to avoid slipping into the 22% tax bracket, which is a big jump. Knowing where you stand can inform tax-reducing strategies such as Roth IRA conversions, deferring income from 2023 to 2024, increasing retirement plan contributions, and “bunching” itemized deductions such as charitable contributions and property taxes due in early 2024.

 

Fourth Quarter Estimate- The last opportunity to apply tax payments toward expected 2023 tax liability and avoid an under-withholding penalty is a fourth quarter estimated tax payment due January 16, 2024. By early January, all information for a tax return should be known, including mutual fund dividend/capital gain distributions that are passed through to investors.

 

For additional year-end tax-saving strategies, consult with a tax advisor or financial planner and/or review this publication from Intuit.

This post provides general personal finance or consumer decision-making information and does not address all the variables that apply to an individual’s unique situation. It does not endorse specific products or services and should not be construed as legal or financial advice. If professional assistance is required, the services of a competent professional should be sought.