We know you don’t want to deal with taxes this time of year, but hear us out: Unique tax-saving opportunities are only available before the year’s end. Think of it as the holiday gift that keeps on giving.
There’s rarely a year in which a few tweaks to your deductions, expenses, contributions, or withholdings aren’t warranted. Look for increasing standard deduction, marginal tax, and capital gains thresholds. Annual inflation adjustments usually bring higher contribution limits to Health Savings Accounts (HSAs), IRAs, and other retirement savings. These inflation adjustments could cause a sudden difference in your expected tax rate.
There may also be new tax laws that create unique opportunities and obligations. The Secure 2.0 Act passed in 2022 includes quite a few. If you haven’t discussed with your tax and financial advisors how Secure 2.0 affects your retirement savings, in particular, do so now. Provisions that increase catch-up contribution limits and mandatory distribution cash-out requirements are already in effect. Required minimum distribution (RMD) will transform over several years. The age required for RMD has increased to 73, and the 50% penalty for failing to take RMD has decreased to 25%. A handful of additional provisions affect 529s, emergency expenses, and employer-sponsored retirement plans. Principal Financial offers a guide here, but again, it’s best to discuss directly with your advisors.
Your own life changes may also affect your tax obligations from year to year, including buying or selling a home or property (or even improving or suffering losses on those properties), business income or ownership changes, or changes in your income, reaching a milestone birthday, or family changes (deaths, births, illnesses, or minors reaching adulthood or going off to college).
- Whether you should sell If you lost money on certain stocks this year, selling off corresponding long- or short-term shares that performed well could offset your capital losses. Conversely, if you experienced gains, you might want to consider selling losses to offset those gains. You can’t replace the sold stock outright, but with the proper guidance, you can replace it with similar investments.
- How you might give money to loved ones. For 2023, individuals can give up to $17,000 to other individuals tax-free (married couples can gift $34,000). These limits include cash, of course, but also property such as land, a car, collectibles, or stock. Giving to others annually in this way can help you avoid future gift taxes or estate taxes on a larger lump sum later on. Remember that tuition and medical expenses for close relatives are not considered gifts and may be eligible for a full deduction.
- Your charitable giving strategy. Giving money or other assets to charity is a great way to reduce your tax bill. Charitable giving is an especially great option if you’re 73 or older because you can donate up to $100,000 from your IRA as part of your Required Minimum Distribution (that total will be indexed for inflation beginning in 2024). Adhere to IRS guidelines for charitable giving for your contributions to be considered tax-deductible. You may want to ask about Donor Advised Funds (DAFs) for setting aside donations that can be distributed over time.
- Deductible business purchases. Business owners have additional considerations to make, including those pertaining to Section 179 deductions and depreciation allowances. Deferring income, funding retirement, recharacterizing IRA contributions, and carrying back or carrying forward business losses could also be opportunities on the table. Some of these additional moves can be made later, but don’t wait to find out which ones.
Between carving the turkey and trimming the tree, “carve” out a little time to investigate whether a little “trimming” of your tax bill can happen, too. You’ll be glad you did. Feel free to contact us with questions.