As the year winds down so, too, does your opportunity to take proactive steps to reduce 2023 income tax due in April 2024 and, perhaps, taxes due in future years as well. Below are some money-saving tax planning strategies to consider. Seek professional advice as needed.
Early RMD Withdrawals- The “financial gap years” between age 59½ and 73 (or 75 if born in
1960 or later) are when there are no longer penalties for withdrawals from
tax-deferred accounts but required minimum distributions are not yet mandatory.
Sometimes it makes sense to pay taxes voluntarily at a lower tax rate during
gap years to save on taxes later at a higher tax rate.
Draft Tax Return- A
draft tax return with “best estimates” of taxable income and tax write-offs is
the first step in a year-end tax review. By early December 2023, income and tax
withholding should be pretty predictable and tax-saving strategies taken so far
(e.g., tax-deferred retirement plan contributions and charitable gifting) are already
accounted for.
Year-to-Year Comparison- Once a draft 2023 tax return is prepared, compare it to 2022. Look for
big changes in income and expenses that will affect taxes owed. Example: savers
earned about 0.25% interest in 2022 vs. 4.5%+ with online banks and money
market funds in 2023. On large account balances, this could result in a big difference
of thousands of dollars of additional taxable income (e.g., $250,000 x .0025 =
$625 versus $250,000 x .045 = $11,250).
Tax-Loss Harvesting- This
is where investors proactively take a loss on the sale of securities to offset
realized capital gains. If losses exceed gains, up to $3,000 can be claimed
against other taxable income and any losses beyond that carried forward to
future tax years. Securities held for a year and a day or longer are taxed at
long-term capital gains rates (versus ordinary income rates for short-term
gains) so it is important to review their holding period before selling.
Tax Bracket Planning- The
objective is to control your marginal tax bracket to avoid paying taxes at a higher rate. For example, if you are near
the top of the income range for the 12% tax bracket, you want to try to avoid
slipping into the 22% tax bracket, which is a big jump. Knowing where you stand
can inform tax-reducing strategies such as Roth IRA conversions, deferring
income from 2023 to 2024, increasing retirement plan contributions, and
“bunching” itemized deductions such as charitable contributions and property
taxes due in early 2024.
Fourth Quarter Estimate- The last opportunity to apply tax payments toward expected 2023 tax
liability and avoid an under-withholding penalty is a fourth quarter estimated
tax payment due January 16, 2024. By early January, all information for a tax
return should be known, including mutual fund dividend/capital gain
distributions that are passed through to investors.
For additional year-end tax-saving strategies, consult with a tax
advisor or financial planner and/or review this publication from Intuit.
This post provides
general personal finance or consumer decision-making information and does not
address all the variables that apply to an individual’s unique situation. It does
not endorse specific products or services and should not be construed as legal
or financial advice. If professional assistance is required, the services of a
competent professional should be sought.
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