When the last few months of the year get hectic with holiday festivities, your taxes might be the last thing on your mind. But thinking about your taxes — and possibly making some money-related changes — before the new year can make a big difference when it comes to how much you owe to (or get back from) Uncle Sam come April.
“A lot of people don’t give nearly enough attention to the amount of latitude that they have in their tax returns,” says Mark Steber, chief tax information officer at Jackson Hewitt Tax Service. “A lot of people think it’s a zero-sum game, and that’s simply not true. You can do smart, practical things that can really help.”
That may be particularly important after a year of high inflation and economic uncertainty.
“The higher your income, the more volatile your refund disappointment or balance-due disappointment can be,” Steber says. “So it can be important to do some year-end projections when it comes to your taxes.”
Here’s are a few tax moves that you can potentially still make to lower your tax bill for 2023 or to reduce the amount you owe in the future:
1. Max out your workplace retirement accounts
While self-employed folks have until tax day (April 15, 2024) to contribute to Individual Retirement Accounts (IRAs) to reduce 2023 income, contributions to workplace accounts such as 401(k)s must be made before the end of the calendar year.
Due to inflation, the contribution maximum for those accounts went up this year to $22,500 (or $30,000 for those age 50 and older). If you didn’t update your contribution levels accordingly, consider boosting them now to get the biggest possible tax break. Putting money into a tax-deferred retirement account not only allows you to lower your tax bill now, but it has the additional benefit for growing tax-free until you tap into the money in retirement.
2. Talk to an advisor about a backdoor Roth IRA
Due to their relatively high incomes, most physicians are ineligible to save money directly in a Roth IRA. However, you can put money into a Roth using a so-called “backdoor method,” where you contribute post-tax funds to a traditional IRA (up to $6500 in 2023 or $7500 if you’re age 50 or older) and then immediately convert them to a Roth. While this won’t reduce your taxes this year, the contribution will grow tax-free over time, and you won’t have to pay any taxes on the withdrawals in retirement. This can provide important flexibility when planning your retirement withdrawal strategy later.
However, if you have an existing IRA funded with after-tax dollars, the rules around how much you can convert can be complicated, so it’s worth discussing the maneuver with a financial advisor before moving forward. Even if the backdoor conversion is not an option for you, you still may have some ability to save in a Roth account through your 401(k), says Nic Yeomans, a certified financial planner and president of Yeomans Consulting Group.
“Under [the 2022 legislation] SECURE 2.0, there are some new rules for Roth 401(k)s, so look to see if you can shift your paycheck deferral from before 401(k) tax contributions to after-tax Roth 401(k) contributions,” he adds.
3. Harvest your tax losses (or gains)
The stock market volatility of the past year has made for a wild ride for investors, but it’s also created potential opportunity to save on your taxes. If you’re holding stocks that you’ve owned for more than a year that have lost significant value — and that you don’t expect to regain their losses — you can sell them to realize that loss and recognize it on your taxes.
“As much as possible, you want to match your capital gains to your losses,” says Bill Smith, national director of tax technical services at CBIZ MHM’s national tax office in Washington, DC. “That’s certainly something you want to take a look at in your portfolio before the end of the year.”
Those realized losses can offset any capital gains that you’ve had in the past year. Lost more than you’ve gained? Additional realized losses can offset up to $3000 worth of regular income this year and be carried forward to offset income or capital gains in the future. Similarly, if you realized losses this year, it might make sense to take advantage of the moment to realize gains on investments that may have peaked.
Keep in mind, the “wash sale” rule from the IRS, which holds that you cannot recognize the gain or loss on your taxes if you purchase a substantially similar investment within 30 days before or after the sale.
“If you want to buy something similar but not substantially identical, you’d want to make it as different as possible to defend in the case of an audit, while at the same time trying to maintain similar economic exposure,” says Eric Bronnenkant, head of tax at Betterment.
4. Give to charity, strategically
The holiday season is a big time for giving back, and if you itemize your taxes, you can deduct donations to qualified charitable organizations from your bill. One way to make your charitable donations even more tax efficient is by giving highly appreciated assets to charity, rather than cash.
“Assuming that you’ve held the asset for more than a year, you’re able to deduct the fair market value of the donation from your taxes, and you don’t have to pay taxes on the gains,” Bronnenkant says. “And, arguably, the third win for some people is that they also effectively reduce the value of their estate, so it helps them minimize estate taxes.”
If you’re contributing non-cash assets to charity, you can deduct up to 30% of your adjusted gross income. (For cash contributions, it’s 60% of AGI.)
Smith notes that the IRS has upped its scrutiny of charitable contributions, so you’ll want to make sure that you follow all the rules, including getting proper documentation from the charity and an appropriate appraisal if you’re giving a noncash item (eg, artwork, a car, furniture) that does not have an obvious market value.
5. Purchase equipment, if you own your business
From 2017-2022, business owners have been able to take advantage of “bonus depreciation” on purchases of qualified business property and equipment, allowing them to recognize 100% of the value of the purchase from their income in the first year it was purchased. That bonus depreciation began to phase out this year, but you can still deduct 80% of the value of a purchase that you make and put into use this year.
Next year, the allowable deduction amount will fall to 60%, so if you’re considering a large purchase, making it by the end of the year could have a much larger impact on your 2023 tax bill than making it in 2024 would have on that year’s tax bill.
“If you’re in the 40% tax bracket and you buy something for $100,000, you’re going to save $32,000 in taxes,” Smith says.
6. See if you qualify for Inflation Reduction Act credits
The Inflation Reduction Act passed last year, and it included a slew of provisions that went into effect in 2023, giving taxpayers money back on their taxes for energy-friendly purchases. These include credits for the purchases of some electric vehicles and for some home renovation projects, including upgrading your home with more energy-efficient doors and windows, moving to greener HVAC systems, or having a home energy audit. If you made any such purchases this year, be sure to claim any credits for which you’re eligible.
7. Put money away into your kids’ college accounts
More than 30 states offer a tax deduction or credit for contribution to a 529 college savings account. The rules vary by state (find the rules for yours here), but opening or funding an account is a great way to earmark savings for college while also lowering your tax bill. Although there is no federal benefit in this tax year for such contributions, the money in 529 accounts will grow tax-free until it’s withdrawn for qualified educational expenses. Plus, under new rules, if you have unused funds in a 529 account that’s been open for 10 years (for example, if your child gets a scholarship or decides not to go to college) you can roll over a portion of it into a Roth IRA for your child.
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