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- One way to save money on taxes next year is to maximize your retirement contributions now.
- You can also harvest investment losses, and leverage tax credits and deductions.
- It’s a good time to adjust withholding, contribute to an HSA, and make charitable contributions.
As the year draws to a close, taxes are probably the last thing on your mind right now. But planning just a little bit ahead of time could pay off big time come tax season.
Here are five tax moves you should make before the year draws to a close.
1. Maximize your retirement contributions
One of the most effective ways to save on taxes is by maximizing contributions to tax-advantaged retirement accounts like 401(k)s and IRAs. By contributing more, you can reduce your taxable income (and grow your nest egg).
The 2023 401(k) contribution limit is $22,500, with an additional $7,500 catch-up contribution if you’re aged 50 and older. If your employer offers matching contributions, you should take advantage of them, as they provide an additional boost to your retirement savings. The 2023 combined employee and employer contribution limit is $66,000.
Make sure to make any 401(k) contributions before the December 31 deadline for them to count towards your income.
If you don’t an employer-sponsored plan, you can contribute to an individual retirement account (IRA). The 2023 contribution limit is $6,500, with an added $1,000 catch-up contribution for those aged 50 and older. Unlike 401(k)s, the deadline to make IRA contributions is April 15, so you have a bit more time.
Remember: Contributions to Roth plans, including Roth 401(k)s and Roth IRAs, are made with after-tax dollars and don’t reduce your taxable income.
2. Harvest investment losses
If you have investments that have declined in value, consider giving them the boot. By selling these investments at a loss, you can offset the capital gains from other investments and reduce your tax liability.
Consider selling off your poor-performing investments by the end of the year and claim a capital loss. If your capital losses are greater than your capital gains, you can reduce your taxable income by up to $3,000. This strategy can be a valuable tool for minimizing your tax liability while rebalancing your investment portfolio.
If your capital losses exceed $3,000, you can carry over the balance into future years and deduct it on future returns.
Keep in mind that tax-loss harvesting should be done strategically. It’s probably a good idea to talk with a financial advisor before you decide to harvest.
3. Leverage tax credits and deductions
Tax credits and deductions can significantly lower your tax bill. Take the time to read up on the options that may apply to you, including Earned Income Tax Credit (EITC), Child Tax Credit, and Education Tax Credits.
Apart from the widely known deductions, such as mortgage interest and student loan interest deductions, there are several credits and deductions that taxpayers often overlook. For example, if you’ve purchased an electric vehicle (EV), you may be eligible for tax credits at both the federal and state levels.
There are additional deductions for energy-efficient home improvements, educational expenses, and healthcare costs. It’s a smart idea to look into these lesser-known credits and deductions to see if you qualify.
3. Take advantage of charitable contributions
It’s the season of giving — which can also save you money on taxes. If you’re considering making a charitable donation, doing so before the end of the year can help reduce your taxable income.
To maximize the tax benefits, consider donating appreciated securities — like stocks — instead of cash. By doing this, you can avoid paying capital gains tax and can take a charitable deduction for the fair market value. Remember to keep proper documentation of your donations for tax purposes.
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4. Adjust your tax withholding
Take a moment to review your withholding and estimated tax payments to ensure they align with your current financial situation. If you had any significant life changes this year, such as marriage, divorce, or the birth of a child, it might be smart to adjust your withholding to avoid overpaying or underpaying your taxes.
If you’re self-employed or have other sources of income not subject to withholding, make sure you’re making appropriate estimated tax payments. Underpayment of estimated taxes can result in penalties, so it’s a good idea to make sure you’re staying accurate.
5. Contribute to a Health Savings Account (HSA)
If you have a high-deductible health insurance plan, contributing to a Health Savings Account (HSA) can be a smart move. HSAs offer a triple tax advantage: contributions are tax-deductible, earnings grow tax-free, and withdrawals for qualified medical expenses are tax-free.
By maximizing your HSA contributions before the year ends, you not only reduce your taxable income but also build a tax-advantaged fund for future healthcare expenses.
As the year comes to a close, taking steps to optimize your tax situation can have a big impact on your finances well into the next year. By doing one (or all) of these five moves before the end of the year, you can potentially save a significant amount of money and set yourself up for success in 2024.