Year-End Tax Strategies

As we move through the holiday season take some time to give yourself and loved ones a year-end bonus. Implementing smart year-end tax strategies now can help retain a greater portion of earned income and save money on 2023 taxes owed when filing federal and state returns in April. It is effectively giving yourself a raise.

Here are some financial moves to consider making before January 1^st that can help.

Maximize Employer-Sponsored Retirement Contributions:
Prior to year-end, maximize your contributions to any employer-sponsored retirement plan, such as a traditional 401(k). The current permissible limit for 2023 stands at $22,500; however, for those aged 50 and above, you may contribute an additional $7,500 to increase your maximum contribution to $30,000. These contributions effectively function as tax deductions, reducing taxable income for the current year and offering a compelling financial advantage. Please note if you opted for a ROTH, rather than the traditional 401(k), ROTH contributions are not tax-deferred as they are made with after-tax dollars. However, income earned on these accounts, from interest, dividends, or capital gains, is tax-free.

Navigate Required Minimum Distributions Efficiently:
Individuals aged 73 and over must adhere to the intricacies of Required Minimum Distributions (RMDs) from their retirement accounts. Recent modifications brought about by the SECURE 2.0 Act have shifted the RMD start age to 73 for 2023 and implemented a more forgiving penalty structure for missed distributions. Our previous blog discusses RMD requirements in more detail.  Nevertheless, consulting with a qualified financial advisor is highly recommended to ensure optimal timing and minimization of the tax implications associated with RMDs.

Leverage Charitable Giving as a Strategic Tool:
Embracing philanthropy during the holiday season can also translate into tangible tax benefits. Itemized deductions and charitable contributions to qualified organizations are deductible up to 60% Adjusted Gross Income (AGI). Consider exploring alternative pathways such as donating appreciated long-term assets through a donor-advised fund, which enables a deduction of the full fair market value (up to 30% of AGI). For individuals aged 70½ or older, a Qualified Charitable Distribution (QCD) provides an avenue to donate up to $100,000 directly from IRAs to a charity, satisfying a portion of an RMD without incurring additional tax burdens.

In addition to charitable giving, understanding the IRS Gift and Estate Tax limits is pivotal for individuals and families engaged in estate planning and wealth transfer strategies. For 2023, the annual gift tax exclusion permits giving of up to $17,000 per individual without triggering gift tax liabilities. See our blog on gift giving limits for 2023 and 2024.

Capitalize Tax Loss Harvesting Opportunities:
Market fluctuations can present strategic opportunities for tax optimization through the practice of “tax loss harvesting.” Strategically selling off investments that have incurred losses can offset other capital gains realized during the year, potentially reducing the overall tax burden. However, it is crucial to remain mindful of the Wash Sale Rule, which disallows losses incurred on the sale of a security when followed by the repurchase of the same or a substantially similar security within a short timeframe (30 days before or after the sale).

Embrace Proactive Planning for a Streamlined Tax Season:
Make a New Year’s resolution to prioritize tax planning and preparation measures for a smoother tax season in 2024. Gather all tax-related documents and consider engaging the services of a skilled tax preparer. Anticipate any significant life changes in the upcoming year that might impact taxes, such as a new job, marriage, retirement or relocation, and factor those into your tax planning.

Seeking Expert Counsel for Customized Solutions:
While these year-end tax strategies offer valuable tools for optimization, it is crucial to acknowledge that every financial situation is unique. Consulting with a qualified financial advisor or certified tax professional allows for the customization of these strategies to align with specific circumstances and maximize potential savings.

With all that goes on in the holiday season, it is easy to put off financial tax planning. Do not wait until the new year arrives – acting today can have a significant impact on what is owed to the government in April.

RJS LAW and its qualified, experienced Tax and Estate/Trust Planning attorneys are available to assist and answer your questions. For a free consultation concerning tax planning strategies, please call 619-595-1655 or contact us via the web at RJS LAW.

Disclaimer: This information is for general informational purposes only and should not be construed as tax advice. Please consult with a qualified tax professional to discuss your specific circumstances.

Written by Devon J. Arabo, Esq., LL.M.