Strategic Moves for Year-End Tax Savings

As we approach the year’s end, it’s prime time to consider savvy moves that could significantly reduce your taxable income. Time is of the essence, so let’s dive into some strategic actions you can take before the year concludes.

✔️ Maximize Pre-Tax Retirement Savings

The deadline for a last-minute lump sum contribution to your 401(k) plan for a 2023 taxable income reduction is December 31st. You can contribute up to $22,500 to a 401(k), plus an additional $7,500 if you’re 50 or older. For added flexibility, you have until April 15, 2024, to contribute up to $6,500 into a traditional IRA. As long as your income stays within phaseout limits, this move can effectively reduce your taxable income on your 2023 tax return.

 ✔️ Consider Roth IRA Conversion

Ponder converting a portion or all of your traditional IRA, SEP IRA, or SIMPLE IRA into a Roth IRA. While you’ll pay income tax on the converted amount for the year, subsequent growth is tax-free in a Roth IRA. Moreover, withdrawals become 100% tax-free after five years from the conversion date.

✔️ Embrace Tax Loss Harvesting

If you own stocks outside a tax-deferred retirement plan, sell underperforming stocks by December 31st. Utilize these losses to offset any taxable capital gains. If your net capital losses exceed your gains, you can offset up to $3,000 against other income, such as wages. Any losses beyond $3,000 can be carried forward to future years.

✔️ Strategic Asset Sales

Assess your current year’s taxable income against next year’s projections. Sell appreciated assets in the year that minimizes your tax liability. Factor in the 3.8% net investment income tax in your estimates for a comprehensive view.

✔️ Optimize Health Spending Accounts

If you’re part of a Health Savings Account (HSA), maximize your annual contribution to trim your taxable income. HSAs permit you to pay for qualified health expenses with pre-tax dollars, and unused funds roll over into future years. For Flexible Spending Accounts (FSAs), carry forward a maximum of $610 from 2023 into 2024 if your plan allows. The deadline for HSA contributions with a deduction for the 2023 tax year is April 15, 2024, with a maximum contribution of $3,850 for singles and $7,750 for married couples. If you’re 55 or older, add an extra $1,000 to your HSA contribution.

As the year draws to a close, these strategic moves can still make a significant impact on your 2023 tax liability. Act now to seize the opportunities available.