2023 End-of-Year Tax Planning Tips to Reduce Your Tax Burden

Don't Overlook These Year-End Tax Strategies to Reduce Your Tax Liability


2023 has certainly been an eventful year, so it’s likely that income taxes have not been at the top of your mind. But there is still time before year end to complete some simple strategies that have the potential to save you big bucks on your 2023 tax bill, and potentially reduce your taxable income.
 

Whether you’re a seasoned investor or a first-time taxpayer, engaging in year-end tax planning can empower you to navigate the complexities of the tax code and make the most of available deductions and credits.  

This blog post will guide you through key tax planning strategies to consider before the year ends, helping you make informed decisions to minimize your tax liability and maximize your financial wellbeing. Here are 4 ways you can lower your 2023 tax bill:

 

1 – IRA Charitable Donations 

IRA Required Minimum Distributions (RMDs) are fully taxable at ordinary income rates, so any reduction or elimination of the amount you take out will help your tax situation.   Those who are philanthropically inclined and are not able to annually itemize deductions can utilize qualified charitable distributions (QCDs), a direct transfer to qualified charities from their IRAs, as an impactful strategy to save money on taxes.  

If you are age 70½ or older, you may utilize QCDs to donate up to $100,000 every year. For individuals age 73 or older, a significant positive of using this QCD strategy is that you can satisfy your IRA required minimum distribution (RMD) by directly donating up to $100,000 of the RMD to charity from an IRA, paying no tax on what would have been a distribution taxed as ordinary income.  

Be mindful that you cannot obtain a double tax break by taking a QCD and receiving an itemized deduction for a charitable gift. Rather than counting as an itemized deduction, QCDs for those taking RMDs may lower your adjusted gross income, which can possibly help you avoid Medicare premium increases.

 

2 – Charitable Contributions 

This is one of the easiest ways to lower your tax bill, and you get the added benefit of helping out others in need.   

Generally, these contributions will only help lower your taxes if you itemize rather than take the standard deduction ($13,850 Single, $27,700 Married Filing Jointly). You can make a gift to any 501(c)(3) organization; if you’re not sure the organization qualifies, simply ask them.   

If you don’t know what charities to gift to right now, no problem–you can also make the gift to a Donor-Advised Fund (DAF).  A contribution to a DAF allows a deduction in the year you make the gift and also provides flexibility in that there are no requirements as to when you have to disburse the funds to charity.  

Read More:  Increase Your Giving Power with Schwab Charitable Donor-Advised Funds 

A great strategy to fund a gift is by using appreciated securities (e.g., stocks, mutual funds, or ETFs).  You’ll first need to check with the organization you’re donating to in order to make sure they can receive securities, but more and more are accepting this method since it’s so attractive to donors.  By doing it this way, you are basically getting more bang for your buck since you don’t have to sell the stock in order to make the gift.   

For example: let’s say you want to make a $1,000 donation to a charity, and you plan to use $1,000 worth of stock you bought five years ago for $100.  If you sell the stock and give them the $1,000 in cash, you will still have to pay taxes on the $900 gain.  If you instead gift the stock to the charity, you don’t have to pay any tax at the time of the transfer, and the charity doesn’t either since it’s a tax-exempt entity. 

If you are in a situation where you are right on the edge of taking the standard deduction and itemizing, you should consider bunching your contributions–making the majority of your gifts every other year in order to maximize your deductions over time.   

For example: let’s look at a married couple whose only itemized deduction is $16,000 in annual charitable contributions.  If they continue to donate $16,000 a year, then they will always end up taking the standard deduction.  If instead they donate $32,000 in one year, they would be able to itemize in that year and take the $27,700 standard deduction the next year.

 

3 – Retirement Savings Accounts 

If your cash flow situation allows for it, max out your traditional 401(k) contribution for the year. Ramping up your pre-tax retirement account paycheck deferrals reduces your Adjusted Gross Income (AGI).  

If you’re under 50 you can contribute up to $22,500; if over 50 you can add an additional $7,500.  A contribution to a traditional 401(k) account will reduce your taxable income dollar for dollar.  If you have some other type of retirement plan or IRA, talk to your CPA to see how much you are eligible to contribute.

 

4 – Tax-loss Harvesting 

Although tax-loss harvesting is a year-round strategy, this is a good time to check if there are additional losses you can take in 2023 in your non-retirement accounts.  The losses can be used against any capital gains incurred throughout 2023 or can be carried forward indefinitely if there are no gains to offset.  Even if you don’t have capital gains in future years, you can deduct $3,000 per year against ordinary income. 

You don’t want to miss out on market activity though, so if you sell to realize a loss, make sure to buy a similar holding (but not the same to avoid the wash sales rules).  Once you’ve held the new investment for 30 days, you can sell and buy back the original one.

 

What Do I Do Next? 

As you navigate the complexities of year-end tax planning, consider exploring the tax planning opportunities that may be available to you with the assistance of a CERTIFIED FINANCIAL PLANNER™ professional.  

While the strategies discussed in this blog may be effective in helping manage your tax burden, they are not all one size fits all or sufficient on their own. A more comprehensive approach involves developing a strategic plan tailored to your specific needs and goals. 

Before determining your next step, consult with your tax advisor and work together to identify the best approach for your specific situation. If you’re unsure of what to do, contact one of our CERTIFIED FINANCIAL PLANNER™ professionals today. We will work with your CPA to help ensure that your overall financial plan fits well with your tax situation. And we’ll refer you to a CPA if you don’t have one. 

Our team is here to help you make informed decisions that align with your financial aspirations. Finding opportunities for reducing the amount of taxes you pay is key to your financial wellbeing. 

 

 

Team Hewins, LLC (“Team Hewins”) is an SEC-registered investment adviser; however, such registration does not imply a certain level of skill or training, and no inference to the contrary should be made. We provide this information with the understanding that we are not engaged in rendering legal, accounting, or tax services. We recommend that all investors seek out the services of competent professionals in any of the aforementioned areas. Certain information provided herein is based on third-party sources, which information, although believed to be accurate, has not been independently verified by Team Hewins. Team Hewins assumes no liability for errors and omissions in the information contained herein. Nothing contained herein may be relied upon as a guarantee, promise, assurance, or a representation as to the future. 

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