Ideas for Last Minute Tax Savings in 2023
As the year comes to a close, there is still time to help lower your tax bill for 2023.
I’m Darren Leader, a partner at Simmons Capital Group. Today I’ll give you some tax tips to consider before year-end to help trim your 2023 tax bill—and set you up for success in the year ahead.
The first thing you may consider is contributing to an IRA or 401k. In the case of traditional IRAs, the amount you contribute gives an immediate tax advantage, as you can deduct this amount from your taxable income. While Roth IRAs provide no immediate tax advantage, as you cannot deduct contributions from your taxable income, the future gains you make are tax-free!
Do some tax loss harvesting to turn stock losses into tax savings. Tax loss harvesting means that you sell one investment at a loss, in order to reduce gains on another investment. If your losses exceed your gains, you have a net loss. Your net losses offset any gains from that year, and up to $3,000 of losses can be used to offset ordinary income, like income from your job.
Consider a Roth conversion. Converting money from a traditional IRA to a Roth IRA has long had many potential advantages. Of course, you need to pay taxes on the converted amount. But once the money is in a Roth IRA, you don't pay taxes on qualified withdrawals, giving you more flexibility to manage your taxes in retirement and boost after-tax income. Plus, there are no required minimum distributions (RMDs) on Roth IRAs during the lifetime of the original owner, allowing for continued tax-deferred growth and making them valuable vehicles for estate planning.
If you have freelance or other part time income, you might consider delaying billing for your services until early next year, thereby limiting your taxable income this year. It’s important to work with your accountant to create the best plan for your situation, as pushing income to next year might just be creating a larger tax problem for you down the line.
If you are feeling generous this holiday season, you could also consider the following tax-smart charitable giving strategies:
As you need to itemize on your taxes in order to benefit from a tax deduction on your charitable giving, donation bunching is a tax strategy that consolidates your donations for two or more years into a single year to maximize your itemized deduction for the year you make your donations. For most Americans, the high standard deduction means that itemization is not the best way to maximize their tax deductions. But for some, it can be worthwhile to bunch their donations into a single year so they can receive a higher itemized deduction for that year and the standard deduction for the other year. Generally, this strategy is used in conjunction with a Donor Advised Fund, so if you would like more information on this strategy, feel free to give us a call.
If you donate long-term appreciated assets like bonds, stocks or real estate to charity, you generally don’t have to pay capital gains, and you can take an income tax deduction for the full fair-market value. It is a great way to avoid capital gains and get a tax deduction for the gift you make.
If you have not yet taken your RMD for 2023, and you don’t need it for living expenses, you might consider a Qualified Charitable Distribution or QCD. Once you reach 70½, you can give away a portion, or all of your RMD, to a charity which satisfies the RMD and also reduces your taxable income. Unlike RMDs, QCDs are not taxable, and each individual can donate up to $100,000 a year from their IRA.
The annual federal gift tax exclusion allows you to give away up to $17,000 each in 2023 to as many people as you wish without those gifts counting against your $12.92 million lifetime exemption. While this doesn’t save you any taxes today, it can help lower your eventual estate tax bill by gifting during your lifetime.
Each person's tax situation is unique, but it's important to consider putting together a plan with enough flexibility to meet your financial goals for the current and future years. As always, consult with your tax advisor or a financial professional to construct a plan that works for you, and feel free to call us at 518 406 5624 or book time on our calendar at simmonscapitalgroup.com if you want to discuss your situation further.