The end of the year is an excellent time for families to take an honest look at how their finances panned out over the previous 12 months, all while asking themselves if they are where they hoped to be. This is true whether people are trying to pay off debt to get themselves in a better financial situation or whether they're in a wealth accumulation phase and on their way to an early retirement. With an entire year of data to pore over, individuals can get an idea of what they earned, where their money went, and steps they could take to improve their financial picture after the clock turns midnight on New Year's Eve.
Until that time comes, however, there are several essential tax savings moves and general financing strategies consumers should consider. Some tax savings tips still within reach this year have to do with charitable giving or getting organized, whereas others aim to help consumers avoid financial waste.
Which tax savings tips should you consider before year's end? Here are six strategies you can add to your to-do list:
Financial advisor Eric Bronnenkant of Betterment says that investors can consider tax-loss harvesting if they want to use losses to lower their tax bills strategically. However, taxpayers considering this move should be aware of the IRS' wash sale rule that prohibits claiming a loss on a “substantially identical” investment bought within 30 days of the sale.
"The goal is to make your replacement investment as different as possible to avoid the wash sale rule, but also ensure that it aligns with your overall investment goals and risk tolerance," he said.
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While investors can assess their portfolio and try out tax loss harvesting strategies on their own, it's worth noting that Betterment and some other robo-advisor platforms offer this service within their paid investment management plans.
Review Your Tax Withholding
Bronnenkant also says that taxpayers (especially freelancers and those with side hustles) should take the time to review their withholding and estimated tax payments before year’s end.
Ensuring you meet the IRS “safe harbor” requirements by paying at least 90% to 110% of your prior year's tax or 100% of this year's tax can help avoid penalties and fees. Meanwhile, timely adjustment of withholdings, like those from an IRA or a 401(k), can offset potential interest charges for underpayment, he said.
Max Out Tax-Advantaged Accounts
While consumers who work for regular employers and save for retirement in a traditional 401(k) may not have time to work with their human resources department to max out their accounts by year's end, self-employed individuals might be able to. And those who save for retirement on their own and still have time to max these accounts should try to do so, said tax specialist Neil McSpadden of Tax Sherpa. After all, contributing more to retirement accounts this year can lower their taxable income, thus paving the way for a lower tax bill (or a larger refund) in 2024 for the 2023 tax year.
The same is true for health savings accounts, which help families save for future healthcare expenses on a tax-advantaged basis. Contributions to these accounts come with annual limits, but amounts added to an HSA are automatically deducted up to those limits to reduce taxable income.
If you have an HSA-eligible health insurance plan or a high-deductible health plan as defined by the IRS, you can contribute up to $3,850 to your individual HSA for 2023 and up to $7,750 for family policies.
You actually have until the tax filing deadline in 2024 to make many of these tax-advantaged HSA contributions for 2023, but it's still smart to get moving on them sooner (even by year’s end) if you can.
Maximize Charitable Contributions
Financial advisor Aviva Pinto of Wealthspire Advisors adds that the best way to reduce estate taxes in the future is to give away as much money as possible while you are still alive. While this isn't a consideration for lower earners or taxpayers who don't have considerable assets, it can be important for long-term investors and people with seven-figure portfolios who don't want more of their hard-earned money to go to taxes than absolutely required.
"If you have more than enough for your life, you can give up to $17,000 a year to as many people as you want," Pinto said. "Married couples can give $34K to each recipient."
The advisor also points out that, at the end of 2025, the estate and gift tax laws are set to end. While each person can currently pass on $12,920,000 without paying any estate taxes (married couples can give $25,840,000), these figures will drop by around half once current laws expire.
"For those with great wealth, estate planning with trusts and other instruments should be looked at immediately before the laws change," Pinto said.
Financial advisor Jennifer Kirby of Talisman Wealth Advisors also points out that getting organized now can lead to a lower tax bill due in 2024. For example, you should take steps to find and organize receipts, invoices, and relevant documents to streamline the tax-filing process.
"Organized records make it easier to identify potential deductions and credits," she said.
This is true whether you plan to file taxes on your own or you opt to use a professional tax service. In either scenario, preparing now can help you avoid being frazzled and overlooking important tax paperwork if you wind up having to file close to the tax deadline in 2024, which is Monday, April 15.
Utilize 529 ABLE Accounts
Finally, John Browning of Guardian Rock Wealth says that 529 ABLE accounts can be a gem for families who have a member with special needs. These accounts allow individuals with disabilities to save for qualified disability expenses without jeopardizing means-tested benefits, he said.
The advisor adds that contributions to 529 ABLE accounts are post-tax but that earnings and withdrawals for qualified expenses are tax-free.
"It's a powerful tool often overshadowed by traditional 529 plans," Browning said.
Since contributions made to a 529 ABLE account are made with after-tax dollars, contributing this year won't reduce your tax bill. That said, taking this step now can help keep taxes and out-of-pocket expenses down for qualified expenses in future years.
There's not much time left in 2023 to get your financial ducks in a row or ensure you're doing all you can to save on taxes, but you still have a few precious weeks left. This may be enough time to boost contributions to accounts to help lower your taxable income, or to make charitable contributions to organizations or even the people you love.
Whatever you do, don't head into 2024 without at least thinking over your financial health and tax plans, and the steps you can take to improve them.
As an expert in personal finance and taxation, I bring a wealth of knowledge and practical experience to guide individuals in optimizing their financial strategies. With a deep understanding of the intricacies of tax planning and wealth management, I have successfully assisted clients in various financial situations.
The article discusses essential year-end tax savings moves and general financing strategies for individuals and families. Let's delve into the concepts mentioned:
- Tax-loss harvesting involves strategically using investment losses to lower tax bills.
- Investors need to be cautious of the IRS' wash sale rule, which prohibits claiming a loss on a substantially identical investment bought within 30 days of the sale.
- Replacement investments should be as different as possible to avoid the wash sale rule while aligning with overall investment goals and risk tolerance.
Review Your Tax Withholding:
- Taxpayers, especially freelancers and those with side hustles, should review their withholding and estimated tax payments before year-end.
- Meeting IRS "safe harbor" requirements by paying at least 90% to 110% of the prior year's tax or 100% of the current year's tax can help avoid penalties.
- Timely adjustments of withholdings, such as those from an IRA or a 401(k), can offset potential interest charges for underpayment.
Max Out Tax-Advantaged Accounts:
- Individuals, especially the self-employed, should aim to maximize contributions to tax-advantaged retirement accounts (e.g., traditional 401(k)).
- Contributions to health savings accounts (HSAs) come with annual limits, and contributing more can reduce taxable income.
- HSAs, with eligible health insurance plans, allow contributions up to certain limits ($3,850 for individuals, $7,750 for family policies in 2023).
Maximize Charitable Contributions:
- Giving away money while alive can help reduce future estate taxes.
- Individuals with considerable assets can give up to $17,000 a year to as many people as they want, and married couples can give $34,000 to each recipient.
- Estate and gift tax laws are set to change at the end of 2025, making immediate consideration for wealthier individuals essential.
- Organizing financial records, including receipts and invoices, streamlines the tax-filing process.
- Organized records make it easier to identify potential deductions and credits, reducing the chance of overlooking important paperwork.
Utilize 529 ABLE Accounts:
- 529 ABLE accounts are beneficial for families with a member with special needs, allowing savings for qualified disability expenses without jeopardizing means-tested benefits.
- Contributions to 529 ABLE accounts are post-tax, but earnings and withdrawals for qualified expenses are tax-free.
In summary, these strategies cover a range of financial aspects, including investment management, tax planning, retirement savings, charitable giving, organization, and specialized accounts for individuals with special needs. Implementing these measures before the end of the year can contribute to a more favorable financial outlook in the coming years.