The Ultimate List of End-of-Year Tax Tips


As the end of the year nears, calendars are crowded but make sure you set aside time to make sure your 2023 taxes won’t come back to bite you in 2024.

Year-end tax moves fall into two categories: options that can save you money and required chores that can cost you money if not done correctly. Here’s what to know.

Need help with a strategy to reduce your taxes? Talk to a financial advisor today.

Avoiding Penalties

Check Your Withholding

Uncle Sam likes to get paid all year long, so if you don’t pass along enough tax money in the form of withholding or estimated quarterly tax payments you’ll face a penalty plus interest, which is now 8% for the IRS. Calculating the exact penalty can be done with IRS Form 2210. If you underpaid withholding by less than $1,000 you’ll face no penalty. You’ll also escape penalties if you paid an amount equal to 100% of last year’s tax or 90% of this year’s tax. You can check your withholding with the IRS online estimator.

Rollovers

If you left a job recently, make sure you rolled any 401(k) or other retirement money into your new employer’s plan or a regular Individual Retirement Account. It’s important to complete a rollover within 60 days of the funds being distributed, unless certain extenuating circumstances apply. Depending on the type of accounts you roll over to and from, a rollover can also impact your gross income, and therefore your taxes. Note that in some cases you may also have to pay a 10% early withdrawal penalty, so you may have to account for that in your budget.

A financial advisor can help you determine the best way to structure your rollovers.

Take Your RMDs

At a certain point, the IRS wants to get its hands on the taxable portion of your tax-deferred retirement accounts, such as traditional IRAs and 401(k)s. This year, that point comes if you hit age 73 during the year – but you’ve got until April 1 to make that first withdrawal. If you’re past that point, you’ve got until Dec. 31. If you miss the deadline, the amount not withdrawn is subject to a 50% excise tax. Example: A 75-year-old with $1 million in accounts would face a penalty of about $20,000. You can see how to calculate your own RMD here.

Cutting Your Tax Bill

Donate Your RMDs

You don’t want to be penalized for not taking your annual RMD, as described above, but if you take it, you’ll pay taxes. One way around that is to make a qualified charitable distribution. An IRA holder can send up to $100,000 to one or several charities with that money counting toward the annual RMD requirement, as well as being a nontaxable charitable donation. In addition, $50,000 can be used in one year one time only to set up a charitable gift annuity.

Talk to a financial advisor to discuss the structuring of charitable gifts.

Take Your Market Losses

If stocks in your taxable investment accounts have taken a dive this year, you can use those losses to offset capital gains on profitable stocks you’ve sold at any time during the year. By using tax-loss harvesting you can sell enough stock to produce a loss that can wipe out your gains plus $3,000 more, turning what would have been a tax bill into a tax refund. Just make sure you don’t purchase similar securities within 60 days or you could run afoul of wash-sale rules.

Convert

If you’ve suffered a loss in an IRA or similar tax-deferred retirement account you can’t take advantage of tax-loss harvesting, but you still can cut your future tax bills by a significant amount. Converting your IRA to Roth IRA means you’ll pay taxes now but that all your future withdrawals – including gains – will come out tax-free. By converting accounts in a down year, you’ll reduce the current tax bite than if you wait for your accounts to recover. Note, you’ll need to keep the Roth account open for five years before making a withdrawal to avoid penalties.

A financial advisor can help you discover more ways to reduce your taxes.

Bottom Line

Year-end tax planning helps you avoid paying penalties for any tax missteps you might have made during 2023 and offers several options that can cut your tax bill – if you act before midnight Dec. 31.

Tips

Tax planning is a huge part of investing and structuring your retirement withdrawals so that you keep as much of your money as possible. Finding a qualified financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with up to three financial advisors in your area, and you can interview your advisor matches at no cost to decide which one is right for you. If you’re ready to find an advisor, get started now.

A financial advisor can help you project your potential retirement income and help provide saving and investment strategies to get you there. Finding a financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with up to three vetted financial advisors who serve your area, and you can interview your advisor matches at no cost to decide which one is right for you.

Photo credit: ©iStock.com/andresr

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