In this article:
- 1. Contribute to Retirement Accounts
- 2. Consider Your Roth Options
- 3. Take Required Minimum Distributions to Avoid Penalties
- 4. Offset Your Capital Gains
- 5. Review Itemized Deductions
- 6. Check Health-Related Deductions
- 7. Make a Charitable Donation
- 8. Take Advantage of Increased 529 Limits
- 9. Defer Income
- 10. Look for Eligible Tax Credits
As the end of the year approaches, it's a good time to think about your remaining opportunities to maximize deductions, claim tax credits, top up retirement savings and more—before we all move on to a new tax year.
Got a few minutes to kick-start your thinking? Here are 10 tax moves to consider before the new year.
1. Contribute to Retirement Accounts
Contribution limits went up for the 2023 tax year, so double-check to make sure you've contributed all you can to employer-based 401(k) plans and individual retirement accounts (IRAs). Contributions to traditional IRA and 401(k) plans are tax-deductible in the year the contribution is made.
- In 2023, you can contribute up to $6,500 to your combined IRA accounts, with an additional $1,000 catch-up contribution if you're age 50 or older. Caveat: Your IRA contributions can't exceed your taxable income for the year.
- The 2023 contribution limit for 401(k) retirement plans is $22,500, plus a catch-up contribution of $7,500 for people 50 and older.
Find Digital Checking Accounts
2. Consider Your Roth Options
Contributions to Roth IRA and Roth 401(k) plans are made with after-tax dollars, so you can't deduct the money you put into a Roth. However, Roth accounts offer tax-free withdrawals, which can save you money in retirement and help defuse a retirement tax bomb.
Check Income Limits for Roth IRAs
Roth IRAs and traditional IRAs are subject to the same combined contribution limits. Additionally, you must meet income requirements to contribute to a Roth IRA. Income eligibility begins phasing out for single filers, heads of household and married people filing separately at $138,000 in 2023. For joint filers, the phase-out range begins at $218,000.
Think About a Roth Conversion
If you prefer the tax-free distributions of a Roth IRA over the taxable withdrawals of a traditional IRA, you can convert traditional IRA funds into a Roth IRA. Be aware, though, that the amount you convert using previously untaxed funds is treated as taxable income. One way to manage the tax expense associated with a Roth conversion is to limit the conversion amount according to your tax bracket.
Say, for example, you'll earn $80,000 in 2023, placing you in the middle of the 22% tax bracket. You can add $15,375 in taxable income before getting bumped up to the 24% tax bracket, so you might convert just that amount to a Roth for 2023. Convert additional amounts (if you'd like) in future years to spread the tax burden over multiple years—and without putting yourself into a higher tax bracket.
3. Take Required Minimum Distributions to Avoid Penalties
You must take required minimum distributions (RMDs) from tax-deferred retirement accounts beginning at age 72 (or 73 if you turn 72 in 2023 or later). If you fail to take RMDs by the end of the year, you could be subject to a 50% excise tax on the amount you were supposed to withdraw.
If you don't need your RMD for income and want to avoid paying taxes on it, you may be able to make a charitable donation directly from your IRA using a qualified charitable distribution. Your donation isn't tax-deductible, but you may be able to use it to satisfy your RMD without adding to your taxable income.
4. Offset Your Capital Gains
When you sell investments for less than you paid for them, you can use the resulting capital loss to offset any capital gains you've made during the year. You can offset all of your capital gains for the year with these losses, and use up to $3,000 of remaining losses to reduce your regular income. Leftover losses may be carried forward into future years.
If your investments were up and down in 2023 and you made taxable gains on your investments, you may want to sell stock (or other investments) at a comparable loss to avoid having taxable capital gains. For example, if you had $12,000 in capital gains this year, you might sell enough unprofitable stock to create a $12,000 loss and bring your taxable gains down to zero.
5. Review Itemized Deductions
Most taxpayers choose to take the standard deduction instead of itemizing. But if your itemized deductions are greater than the standard deduction for your tax filing status, you may want to take a closer look at potential deductions. Here are a few to consider:
- Interest paid on your home mortgage
- State and local income taxes
- Property taxes
- Sales tax
- Gambling losses
- Moving expenses
- Losses from a federally declared disaster
6. Check Health-Related Deductions
Before the year ends, you may want to check in on various health-related expenses.
Health Savings Account (HSA) Contributions
Single taxpayers can make HSA contributions of up to $3,850 (families up to $7,750) if they have an HSA and qualifying high-deductible health insurance. HSA contributions are tax deductible in the year they're made. The money also grows tax-free and is not taxed when you withdraw it to pay for health-related expenses.
Flexible Spending Account (FSA) Spending
Remember to spend any use-it-or-lose-it funds in your tax-advantaged FSA before the year ends.
Medical Expense Deduction
If you had a slew of out-of-pocket health care bills this year and you itemize your deductions, you may be eligible to deduct a portion of your medical expenses. You can't deduct expenses that were paid for by insurance, but you can deduct medical, dental and other qualifying health care expenses that exceed 7.5% of your adjusted gross income.
7. Make a Charitable Donation
If you itemize, you may be able to deduct charitable contributions of money or property, up to 60% of your adjusted gross income. The IRS has detailed rules on charitable contributions; not every charity or contribution will earn you a tax deduction.
8. Take Advantage of Increased 529 Limits
Contributions to 529 educational plans aren't tax-deductible. However, 529 college savings accounts do offer tax advantages. Your money grows tax-free in a 529 and is not subject to taxes when you (or the beneficiary of the account) withdraw it to pay for qualifying educational expenses.
If you'd like to gift 529 funds to children or grandchildren in 2023, you can contribute up to $17,000, the exclusion limit for gifts to individuals. This limit increased from $16,000 in 2022.
9. Defer Income
Do you expect a large year-end bonus, payment for freelance work or any other taxable windfall before the year's end? You may want to try deferring that income to next year so it doesn't add to this year's tax bill.
To be clear, asking to have your year-end bonus paid in January won't let you avoid taxes altogether: You'll have to pay taxes on the money next year. But if you're trying to minimize this year's tax liability, or you'd like to have an additional year to plan for the taxes you'll owe, try asking to defer your bonus or delay billing your freelance clients until late in the year in hopes of moving some of your income into the next tax year.
10. Look for Eligible Tax Credits
Pandemic-era expanded tax credits have largely expired, but you may still qualify for refundable and non-refundable tax credits that can reduce your tax bill dollar for dollar.
These may include:
The Bottom Line
Though your 2023 taxes aren't due until April 2024, making these tax moves before the year ends will stand you in good stead for the tax season to come. Expect to see plenty of year-end paperwork starting in January, including W-2 and 1099 forms that report your income. Start a paper file and a computer file to hold these forms until you're ready to complete your taxes and submit your return.