6 important year-end tax tips to consider before the New Year
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Updated: February 10, 2023
Is it too early to be thinking about your taxes for 2024? Not at all — in fact, you can take important steps right now to prepare for tax season. Your tax bill could be much less (or your refund much more) simply by completing a few tasks before the New Year’s Eve countdown ends.
While you likely keep an eye on income and deductions throughout the year, now’s when you can make some year-end moves. From maxing out tax-advantaged accounts to taking care of deductible expenses, these tips could save you significant money when you file your 2023 tax return.
Paying your taxes is a requirement, but considering these ways to reduce your taxable income could ease the pain of the tax process.
1. Check your tax withholding
Your tax withholding determines how much tax is taken from every paycheck. The IRS recommends you check your tax withholding and make adjustments if needed at the end of each year.
Even if you think the correct amount is withheld from your paychecks, take a few minutes to verify this. As tempting as it can be to imagine yourself receiving and investing tax refunds of four or five figures, the truth is that a large refund shouldn’t be your main objective.
Too much tax withholding does give you the peace of mind that you won’t owe the IRS in April, but there are downsides: You’ll miss out on interest-earning opportunities and risk the IRS delaying your refund in the spring.
However, no one wants to owe the IRS money. The key is to calculate your tax withholding properly so that you aren’t paying too much or too little throughout the year. You can use the IRS Tax Withholding Estimator to determine whether you’re currently at the right amount. Consider filing a new W-4 with your employer to adjust your withholding.
2. Maximize your retirement contributions
One of the best tips to heed at the end of the year is to max out your retirement contributions to an employer-sponsored or self-employed retirement plan. The deadline to contribute to your 401(k), 403(b), 457, or Thrift Savings Plan (TSP) for retirement is December 31, 2023.
You may contribute up to the maximum retirement contribution limits by year’s end. For 2023, the IRS allows you to contribute up to $22,500 of your earned income to a 401(k). Plus, if you’re 50 or older, you can contribute up to another $7,000. Remember that if you have a traditional 401(k), your contributions can be deducted from your annual taxable income.
Read more: How to make the most out of your 401(k) in 2023
Self-employed retirement plans
If you’re self-employed, this tip applies to you too! Before the end of the year, you can either start or add contributions to a solo 401(k) plan up to the same maximum as for an employer-sponsored 401(k). You can elect to defer up to 100% of your earned income, up to $22,500 for 2023.
In addition, self-employed folks are also considered the employer in this case so that you can make nonelective contributions. This can be a complex calculation, so you may want to consult a tax advisor.
Remember that you can open up a 401(k) or related investment plan anytime throughout the year. A key self-employment tax strategy is funding your retirement account, even if you don’t make the maximum contribution. Though it’s not a tax deduction, it can reduce your adjusted gross income, which might move you to a lower tax bracket.
Read more: The 5 best solo 401(k) providers For 2023
3. Open an HSA
Many people take advantage of Health Savings Accounts (HSAs) to pay for eligible medical costs and as an investment tool. If you haven’t considered this type of account, you might open an HSA now to start socking away money.
Even though HSA contributions don’t have a deadline of December 31, while you’re taking all these steps to minimize your tax bill, you might as well get your HSA started.
HSA accounts must be used to pay for future medical expenses. If you have a high-deductible health plan, you can open an HSA and start funding it. They’re an incredibly tax-friendly account because your contributions are pre-tax, plus you won’t pay taxes on withdrawals for qualified medical expenses.
Using an HSA as an investment vehicle requires keeping careful records of all medical expenses. In 2023, contributions are limited to $3,650 for individuals and $7,300 for families with high-deductible health plans. Maxing out your HSA funds by the end of December may be smart.
4. Consider your charitable donations
Along with all the holiday cheer, the end of the year means an opportunity for charitable giving. If you’re interested in giving to worthy causes, consider maxing out your charitable contributions before January.
However, keep in mind that you’ll need to itemize your deductions for this to affect your tax bill. Since the standard deduction increased quite a bit to reflect inflation this year, many Americans won’t benefit much from itemization, but it’s worth comparing your options.
Donor-advised funds (DAFs) can be helpful if you plan to itemize your deductions, and you’ll want to act before December 31 to complete any tax-deductible contributions.
5. Take advantage of tax-loss harvesting
Tax-loss harvesting is a good way to make the best of the challenges that come with investing. Tax-loss harvesting is a form of tax planning used to reduce capital gains taxes by offsetting capital gains with losses.
It works by selling investments at a loss and then using those losses to offset the taxable gains from other investments. The goal is to lower overall tax liability and keep more money in your pocket. Tax-loss harvesting can be used to reduce taxes on both short-term and long-term capital gains.
You don’t have any actual capital gains unless you’ve sold an asset that grew in value. It’s worth examining whether it would benefit you to sell losing positions and reallocate taxable investments. If your capital losses were more than your capital gains in 2023, you can deduct either $3,000 or the total net loss, whichever is less.
Before the end of the calendar year, investors can consider selling shares of a stock or index fund that have declined in value to offset investments that would result in capital gains taxes. However, this strategy won’t apply to tax-advantaged accounts like IRAs and 401(k)s. It’s also not useful if your income puts you in the 0% tax bracket for capital gains.
Read more: How to offset capital gains tax on your investments
6. Conduct a Roth IRA conversion
A Roth IRA conversion can be a smart year-end tax strategy for someone with low taxable income in 2023. If you have funds in a traditional IRA, you’ll eventually pay income tax on your withdrawals, but with a Roth IRA, your withdrawals are tax-free.
Another benefit of a Roth IRA over a traditional IRA is that there are no required minimum distributions (RMDs) with the Roth account. This enables you to safeguard more money for retirement, allowing it to continue to grow.
Tax-free distributions from a Roth IRA result in lower overall income. You will be subject to taxes on the converted portion, but once the conversion is complete, your funds will grow unhindered by further taxation.
This can be effective if you anticipate moving to a higher tax bracket in 2024 and don’t expect to need the converted Roth funds for at least five years. A Roth IRA conversion can be complex, so consulting with a tax advisor beforehand is wise.
The bottom line: Take steps to protect more of your income now
How much of your income goes to the IRS in taxes depends mainly on what you do at the end of the year, so be sure to consider the following year-end tax tips that apply to you. You should consider using a tax advisor or checking out tax software to help guide you through the process.
Don’t pay more in taxes than you need to. Let appropriate tax deductions and other tax-advantaged moves set you up for years to come.
More on taxes:
- 10 best self-employment tax deductions to take in 2023
- The 5 best types of tax-deferred accounts
- ELI5: How do tax-advantaged accounts work?
- 9 ways to reduce your taxable income in 2023
Kate Underwood is a freelance contributor for Moneywise.
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