The hustle and bustle of the holiday season is upon us, and while you’re likely busy hunting for the perfect gifts for your loved ones, don’t forget that you can gift yourself something too—a tax break. With the end of the year quickly approaching, now’s the time to make important year-end money moves that could gift you a smaller tax bill, bigger tax refund, or a better overall financial position in the year ahead. Here are five tax-savvy money moves to make now.
1. Get Your Gifts Ready: If you’re feeling generous with your wealth and would like to pass some of it on to a loved one or other beneficiary, you can gift up to $17,000 (or $34,000 for married couples filing a joint tax return) without triggering a gift tax or reducing your lifetime gift and estate tax exemption.
If you wish to make charitable gifts in sums that warrant itemizing your deductions, cash donations to qualified charities can generally be deducted from taxable income (up to 60% of adjusted gross income [AGI]). Donating appreciated long-term investments can also be a generous but tax-savvy move, as you don’t have to recognize the capital gains and you can take a tax deduction equal to the full fair market value of the donation (up to 30% of AGI). It’s best to check with your broker for the final date they’ll be able to process your gift.
A qualified charitable distribution (QCD) could also be considered if you need to take required minimum distributions (RMDs) from your retirement accounts. For 2023, you can donate up to $100,000 to a charity directly from your IRA using a QCD. While there’s no tax deduction for the donation, the gifted amount can be used to satisfy all or part of your annual RMD without increasing your taxable income.
2. Revisit Your Retirement Savings: Now is an ideal time to see if you’re on track for maximizing your retirement savings for the year. Contributions to tax-deferred retirement accounts—like your employer’s 401(k) or 403(b)—reduce your taxable income, thus lowering your tax bill. The contribution limit in 2023 is $22,500, or $30,000 if you’re age 50 or older. If you contribute to an IRA outside of an employer-sponsored account, the contribution limit to an individual traditional IRA is $6,500, and an additional $1,000 catch-up contribution is allowed if you’re age 50 or over. However, if you or your spouse are covered by an employer retirement plan, contributions to a traditional IRA may not be fully tax-deductible, as deductions phase out depending on income.
You may also want to consider investing in a future tax break. For the 2023 tax year, individuals with an AGI of $138,000 or less ($218,000 for married couples filing a joint tax return), regardless of whether they participate in an employer retirement plan, can contribute up to $6,500 (or $7,500 if age 50 or older) to a Roth IRA. Since contributions to Roth IRAs are made with after-tax money, your investments grow tax free indefinitely. Non-working spouses can also contribute to a Roth IRA as long as the working spouse has earned enough income during the tax year to cover both contributions.
3. Give Your Health Savings Account (HSA) a Check-Up: If eligible, a tax-smart way of setting aside money for qualified medical expenses and lowering your taxable income is to contribute the maximum amount allowed (or the maximum you can manage) to an HSA. HSAs offer several advantages: You pay no federal taxes on your contributions, no federal taxes on investment earnings, and no taxes on withdrawals if the money is used for qualified medical expenses. For 2023, the contribution limit is $3,850 for individuals or $7,750 for families; an additional $1,000 catch-up contribution is allowed if you’re 55 or older.
4. Rethink Where You Park Your Cash: As interest rates have risen, being mindful of the tax consequences of interest-earning savings accounts is important. For a more tax-efficient savings vehicle, consider buying Series I savings bonds issued by the U.S. Treasury. These bonds earn both a fixed rate of interest and a variable rate that tracks inflation. Individuals can purchase up to $10,000 in I bonds electronically per calendar year, and an additional $5,000 in paper I bonds can be purchased when you file your federal tax return. The tax benefit of saving via I bonds is that the interest earned is exempt from state and local taxes (and may even be exempt from all taxes if used for qualified higher education expenses).
5. Harvest Your Investment Losses: Given the stock market’s volatility this year, perhaps you have some investments (i.e., stocks, bonds, mutual funds, etc.) in a taxable account that have declined in value. Selling these investments will realize the losses, which will offset any realized capital gains and reduce your taxable income. Capital losses offset capital gains without limitation, and an additional $3,000 of realized losses can offset other income (losses in excess of $3,000 will be carried forward to the next tax year). Just be aware of the wash sale rule—buying back the same shares of stock or using the proceeds to buy shares of a substantially identical company within 30 days will defer the realized loss.
If navigating your taxes and personal finances is a challenge, know that a CPA—a certified public accountant—can help. A CPA can advise you on how to strategically manage your finances all year long and then prepare and file your tax return to ensure all eligible credits and deductions available are maximized. The Illinois CPA Society’s free “Find a CPA” directory can help you find the trusted, strategic advisor that’s right for you based on location, types of services needed, and languages spoken. Find your CPA at www.icpas.org/findacpa.