Preparing for the New Year With End-of-Year Tax Planning

The end of the year is in sight, and holiday festivities aren’t the only thing we should be planning for. It’s also a pivotal time for tax planning. Here are the crucial tax moves to consider before the year wraps up.

Why does end-of-year tax planning matter?

The April tax deadline may feel like a distant concern as we approach the year’s end, but taking proactive steps now can significantly influence your tax bill later. The year’s final months are a prime window to execute strategies that optimize deductions, credits, and overall tax liability. It’s the financial foresight during this crucial period that can be the difference between a satisfactory tax return and one that brings substantial savings.

Top areas to focus on

Retirement accounts

Make as many IRA or 401(k) contributions as possible before December 31. For 2023, the 401(k) contribution limit is $22,500 (with an additional $7,500 catch-up if you’re 50 or older) $6,500 for a traditional IRA (with an additional $1,000 catch-up contribution if you’re 50 or older).

Required minimum distributions (RMDs)

Individuals 72 or older must withdraw a specific amount from certain tax-deferred retirement savings accounts. Failing to meet the RMD deadline (December 31) or withdrawing insufficient amounts can result in hefty penalties.

Charitable contributions

If you’re philanthropically inclined, donating to recognized charities can provide you with valuable tax deductions. Consider giving cash, assets, or, if you’re older than 70 ½, taking advantage of qualified charitable distributions (QCD), which allow you to donate directly from an IRA.

Harvesting losses

A classic strategy for reducing tax liability, tax loss harvesting involves selling investments at a loss to offset taxable capital gains you’ve made throughout the tax year. The IRS allows you to use $3,000 in losses to offset other income, and any excess losses can be used the following year.

What are other tax-saving strategies to consider?

Accelerate or defer income

If you’re expecting a bonus or a surge in income that may push you into a higher tax bracket, see if it can be delayed to the next year so your current tax rate doesn’t increase. Conversely, if next year you expect to be in a higher tax bracket next year, you may choose to accelerate that income instead and pay the taxes while you’re in a lower bracket.

Roth IRA conversions

Are you considering opening a Roth IRA? The conversion must be complete by December 31, so starting the process early is crucial. While you’ll owe taxes on the amount converted, this strategy can be helpful if you expect to be in a higher tax bracket in retirement, as Roth IRAs allow for tax-free withdrawals. You also won’t have to take any required minimum distributions.

Gift-giving

The approaching holiday season isn’t the only reason to consider giving gifts. The IRS allows for tax-free gifts up to a certain amount each year. In 2023, you can gift up to $17,000 to any individual without either party having to pay a gift tax. If you’re married, you can contribute a combined $34,000.

Professional advice

Tax laws and regulations can be complex. Consider seeking advice from a qualified tax professional to ensure you’re taking the right steps to optimize your taxes before the end of the year.

Who should be making tax moves right now?

Business owners: Year-end is a critical time to review business expenses, consider making major purchases that can be deducted, and re-strategize for the upcoming year.

Individuals with significant life changes: Marriage, divorce, the birth of a child, or buying a home can significantly impact your tax situation. Be aware of new credits, deductions, and liabilities, and adjust withholding and payments accordingly.

High-income earners: Nearing year-end, those in higher tax brackets should review tax-advantaged investments, consider year-end deferment strategies, and evaluate charitable contributions for deductions.

Investors: Now’s a great time to review your portfolio, take advantage of any tax loss harvesting, and ensure your strategy is aligned with your overall financial goals.

Proactive planning can pave the way for a smoother tax season. Learn more about our comprehensive financial planning services, and let us guide you through maximizing your end-of-year opportunities.