With the end of the year fast approaching, a little year-end housekeeping could help lower your taxable income, maximize your charitable deductions, and reduce exposure to future taxes.
Lowering your taxable income
The end of the year is a great time to take stock of what opportunities are available to you and how you can use them to your advantage. Here are some ways you might be able to hang on to more of your hard-earned money:
- Tax-loss harvesting. Investment losses can be used to offset any gains you've realized in 2023, or up to $3,000 of income. Consider selling depreciated securities that no longer fit your strategy, have poor prospects for future growth, or can be replaced with similar investments that play a similar role in your portfolio.
- Contributing to tax-advantaged accounts. Contributions to a 401(k), 403(b), or a health savings account1 could potentially lower your taxable income for this year and increase the assets you have available for future retirement and medical expenses. It's good practice to review your contributions before year-end to ensure you're taking full advantage of the limits for these accounts.
Maximizing your charitable deductions
If you're like me, your mailbox is probably filling up with letters from the charities you support asking for additional end-of-year contributions. Giving is inherently rewarding, but you may also want to consider ways to give tax-efficiently. Here are some tax-efficient giving strategies based on current law:
- Bunching charitable contributions. It may be wise to make 2 or more years' worth of charitable contributions this year so you can itemize deductions versus splitting them over multiple years and taking the standard deduction each year.
- Donating appreciated assets. If you are itemizing deductions, and you donate an asset held for longer than one year to a qualified public charity, you may be able to deduct the fair market value of the asset without paying capital gains on a sale, subject to a 30% adjusted gross income (AGI) limitation.
- Making cash contributions. If you are itemizing deductions, remember that up to 60% of your AGI can be deducted for cash contributions made to qualified charities in 2023.
Reducing exposure to future taxes
Year-end planning isn't just about the here and now. There are several things you can do before the end of this year that could help reduce the impact of future taxes and provide added benefit to your beneficiaries or favorite causes:
- This year's lifetime estate and gift tax exemption increase. In 2023, the inflation adjustment for the lifetime estate and gift tax exemption was quite large: $860,000. For those who had already maxed out their exemption prior to 2023, this offers an additional opportunity to move money out of their estate—as much as $1.72 million for a married couple. While this isn't something that has to be done within the calendar year, you should take it into account when making future plans.
- Annual exclusion gifts. You can make gifts up to $17,000 to as many beneficiaries as you like, which can help reduce your estate's value without using any of your lifetime gift and estate tax exemption.
- Qualified charitable distributions. If you are age 70½ or older and have an IRA, you may want to consider making direct transfers of up to $100,000 from your IRA to eligible charities. This could potentially reduce the amount of current or future required minimum distributions. Additionally, a direct transfer does not increase your AGI, meaning it will not adversely affect your itemized deductions, Medicare premiums, or Social Security benefits.
- IRA or 401(k) distributions. This may be worth considering if you have relatively low income this year, especially if you believe that tax rates will rise in the coming years.
- Roth IRA conversions. In 2026, income tax rates will revert back to their 2017 levels provided there is no change to the sunsetting provisions of the 2017 Tax Cuts and Jobs Act. Those changes could have a significant impact on a family's tax liability, which could make Roth conversions less appealing in 2026 and beyond. Before you decide, however, understand that you will need to have other liquid assets available to pay the associated income tax due as a result of the conversion.
Keep a long-term perspective
While we can never predict the future with certainty, it's never a bad thing to be educated on the possibilities of different outcomes. By understanding these possibilities, we can build enough flexibility into our plans to ensure that we're able to stay focused on our long-term goals and objectives. Before you determine your next step, consult with your tax advisor and work together to identify the best approach for your specific situation.
David is responsible for Fidelity's estate and wealth planning activities, including creation of new thought leadership in these areas. He heads a team of professionals that develops and delivers the depth and breadth of Fidelity's wealth planning offering.
Prior to joining Fidelity, David was managing director and head of Insured Solutions for UBS Wealth Management Americas. He served as chief operating officer of UBS Wealth Planning. David first joined UBS as a senior member of UBS Private Wealth Management, and was involved in the creation of that business for the firm. During his tenure with UBS, he also served as the chairman and president of UBS Life Insurance Company USA, Inc.; the chairman and president of UBS Financial Services Insurance Agency, Inc.; and a board member of UBS Trust Company, N.A.
Prior to joining UBS, David was a director in Merrill Lynch's Private Banking & Investment Group. He joined the firm's International Private Banking business in London and was a key member of the firm's Corporate Strategy unit.