As the end of the year approaches, the clock is ticking for important choices that could help lower your tax bill for 2023. With inflation cutting into paychecks and taxes scheduled to increase for some after 2025, due to the sunsetting of many provisions of the Tax Cuts and Jobs Act, you'll want to snag every tax break you can now. Here are a dozen tax tips to consider before year-end to help trim your 2023 tax bill—and set you up for success in the years ahead.
1. Contribute to tax-advantaged accounts. While you have until the tax filing deadline of April 15, 2024, to contribute to an IRA for the current year, you must make your final contributions to most workplace retirement plans, such as a 401(k) or 403(b) by December 31, 2023. You can contribute up to $22,500 in total combined traditional and Roth contributions. If you're 50 or over, you can make additional catch-up contributions of $7,500. If you choose to make traditional contributions, they will reduce your taxable income dollar for dollar. And don't forget about health savings accounts (HSAs) if you have a high-deductible health plan. While you also have until the April tax filing deadline to contribute, you can put away up to $3,850 for self-only coverage and $7,750 for family coverage. Contributions can help to lower your taxable income, and distributions are tax-free if they are used for qualified medical expenses. HSA assets are also not subject to the “use it or lose it” rule. Unused funds may be used to pay for future qualified medical expenses.
2. Turn investment losses into tax gains. Lost money on your investments this year? With this year's market volatility, you're not alone. But you can take some of the sting out of those losses by tax-loss harvesting. This strategy generally allows you to sell investments that are down, replace them with reasonably similar investments, and then use those losses to offset realized investment gains plus up to $3,000 of regular income each year. The end result is that less of your money goes to taxes and more may stay invested and working for you. Also, unused losses carry over to subsequent years. But this strategy can be complicated. Wash sale rules may apply, meaning you can't sell most investments for a loss and reinvest in the same, or a substantially identical one, 30 days prior to or after the sale, or you'll lose the tax break. An exception: Wash sale rules currently do not apply to cryptocurrencies, as they are not regulated as securities. That means you can sell coins whose value has declined, and buy them back immediately at the same price, potentially realizing the loss while still holding the asset. Pending legislation about cryptocurrency regulations may eliminate this loophole, however, so be sure to work with a tax professional to stay on top of changes.
3. Consider a Roth conversion. A Roth conversion involves transferring money in a traditional IRA to a Roth IRA. You'll pay taxes on the converted amount, but then the money has growth potential and can be withdrawn tax-free1—and it isn't subject to required minimum distributions for the life of the owner. Why consider a Roth IRA conversion now? First, with many investments down this year, you can convert more shares for the same total amount and same potential tax bill. Also, tax rates are set to increase in 2026 when the Tax Cuts and Jobs Act expires, so you could end up paying higher rates later on conversions.
4. Consider itemizing. There are 5 main categories of itemizable deductions, subject to various limitations, and if these categories add up to more than the standard deduction, you may want to itemize. For 2023, married couples have a standard deduction of $27,700 and single filers a standard deduction of $13,850. Generally speaking, you can deduct medical expenses, home mortgage interest, state and local taxes, charitable contributions, and theft and casualty losses due to a federally declared disaster—think the Maui wildfires this summer. Many deductions have limits, however. For example, you cannot deduct health care costs that are less than 7.5% of your adjusted gross income (AGI).2 Deductible expenses may include fees for doctor and hospital visits, dentists, chiropractors, mental health care, medical plan premiums, and much more. If you are close to 7.5% of AGI, consider getting treatments and paying other medical bills before year-end, particularly if you were planning to do so early in the new year.
5. Trim college costs with education breaks. The American Opportunity Tax Credit provides a dollar-for-dollar credit on a portion of qualified education expenses paid for an eligible student for the first 4 years of higher education. The full $2,500-per-student credit requires $4,000 in qualified spending, and is available to people whose modified AGI is less than $80,000 for single filers and less than $160,000 for joint filers. “To make the most of this break, you might want to consider prepaying the first semester of 2024 this year,” says David Peterson, Fidelity's head of wealth planning. Additionally, some states may provide a state income tax deduction on a portion of contributions made to a 529 college savings account. Please check the 529 program description for specific details on any available state tax benefits associated with a state’s 529 plan offering. Although 529 plans have a maximum contribution limit, you may gift up to $18,000 (in 2024) a year per 529 account beneficiary with no other gifts to the beneficiary in that year without a potential federal gift tax impact. However, for any 529 account beneficiary, you can contribute up to 5 times the annual federal tax fee maximum per individual ($18,000 in 2024) at one time without triggering the federal gift tax so long as you file Form 709 with your federal tax returns for the year the contribution was made and make no other taxable gifts to the 529 account beneficiary during that year or the next 4 calendar years.
6. Defer some income. If you have freelance or other gig income, you might consider delaying billing for your services until early next year, thereby limiting your taxable income this year. Be sure to work with your accountant to create the best plan.
Are you in a generous frame of mind? Make the most of your giving and gifting with these tax-smart strategies:
7. Bunch charitable contributions. Bunching means concentrating charitable deductions in a single year, and skipping the following year, or even several years. The following year, you likely wouldn't claim charitable deductions, but you'd still qualify for the standard deduction. And if you put your contributions into a donor-advised fund, you can take the charitable deduction in 2023 but spread your giving out over many years. If you want to itemize, this strategy can help. Deducting charitable contributions may be subject to AGI limits depending on the receiving charity and what you donated. (See more below.)
8. Donate appreciated assets. Itemizers can also donate appreciated assets held longer than one year to a qualified public charity and deduct the fair market value of the asset without paying capital gains tax. The donation is subject to a 30% adjusted gross income (AGI) limitation.
9. Don't forget contributions of cash and property. Itemizers can deduct cash contributions as well as property—think the table you donate to your local school—up to 60% of your AGI. In addition to determining the fair market value of donated items, the IRS requires documentation, such as a qualified appraisal, for many deductions over $5,000. Exceptions may include personal property owned less than one year, and publicly traded stock and mutual funds.
10. Consider gifting to loved ones. You can gift up to $17,000 per recipient to as many people as you like. (This amount increases to $18,000 in 2024.) So if you have 4 children, you can give $17,000 to each one. (If you're married, each person in the couple can gift this amount.) While you don't get an income tax deduction for such gifts, the recipient won't owe taxes, and the gift can help reduce the value of your estate, without using up your lifetime gift and estate tax exemption.
Are you 73 or older? Get tax-smart about required minimum distributions (RMDs) from retirement accounts.
11. Don't forget RMDs. If you're 733 or older, you have until December 31 to take your required minimum distribution, or RMD, from traditional IRAs, 401(k)s, and other qualified retirement plans.4 This is an important deadline: Missing it can result in a hefty penalty of 25% of the required RMD. Your first RMD is due by April 1 of the year following the year you turn 73. If this is your first year, think carefully about waiting until the April 1 deadline of the following year. You may be taking 2 RMDs in a single tax year, which can increase your taxable income. Remember, withdrawals are taxable, but there are ways to help reduce taxes with careful planning.
12. No need for your RMD? Consider giving it to charity. You can make a qualified charitable contribution (QCD) from an IRA of up to $100,000 per individual (twice that amount if you're married and filing jointly), as long as the charity receives your donation by December 31. The money you donate is not deductible, but it's not subject to federal taxes, qualifies as your RMD for the year, and you can make one even if you don't itemize. QCDs are also allowable starting at age 70½, so you don't have to wait until you're 73 to take advantage of one.
Looking ahead to 2024
Each person's tax situation is unique, and inflation adjustments to tax brackets announced by the IRS for 2024 mean people may have more taxable income before being bumped into a higher tax bracket, which may affect some tax decisions. 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.