Five tax-aware strategies that could help you discover opportunities to save on taxes.
At the end of the calendar year, if you take the time now to learn the tax rules, you may discover opportunities to help save on your taxes.
Here are five tax-aware strategies to consider now.
1. Make charitable donations now to get a 2023 tax deduction or consider “bunching” gifts to climb over the standard deduction.
Do you itemize your taxes? If yes, you may be able to reduce your taxable income through charitable deductions if you are eligible. Let’s dig into the rules.
For 2023, the standard deduction is $13,850 for single filers and $27,700 for married couples filing jointly. But what if you are very close—but not touching—the standard deduction? There is a strategy you can consider: bunching your 2023 and 2024 charitable donations together in 2023 to climb above the standard deduction.
2. Harvest your investment losses.
While you are reviewing your portfolio, consider if your current asset allocations still align with your long-term goals. If you discover losses in a taxable account, you could use those losses to offset any realized capital gains for 2023. If appropriate, you can always repurchase the investments, but be sure to do it at a later date and avoid the wash sale rule.
To set this strategy into motion, tally up your potential losses, then sell out of losing positions that no longer make sense to hold. You can use those losses to offset any realized capital gains. If you still have losses left over, you can offset up to $3,000 of ordinary income annually and carry forward any remaining losses to be utilized in subsequent years.
3. Be strategic with your annual exclusion gifts.
Annual exclusion gifting is a common way to help your estate pass on assets tax-free.
Here are the basics: You can give any number of people up to $17,000 in 2023 without triggering a taxable gift, according to the IRS. That number climbs to $34,000 for married couples. The IRS calls these amounts the “annual gift tax exclusion,” which simply means if you give that amount or less you generally don’t need to report it to the IRS. But be aware that a married couple “gift splitting” does require the filing of a Gift Tax Return (709), regardless of the amount.
4. Review your investment location with an eye toward taxes.
In investing, “location” can matter when it comes to taxes. For example, there are different tax implications depending on which types of investment accounts you choose.
With a taxable brokerage account, you are taxed on interest, dividends, capital gains, or distributions from mutual funds as they occur.
In a tax-deferred retirement account, like an individual retirement account (IRA) or 401(k), you’ll generally pay taxes when you eventually withdraw the assets.
In a Roth IRA, earnings and distributions are tax-free as long as you are over age 59 ½ and the account is at least five years old.
Depending on your long-term investment goals and investment preferences, you could benefit from a tax standpoint by investing in more actively-managed mutual funds in your retirement accounts and by investing in exchange traded funds (ETFs)—which are generally more tax-efficient because they tend not to distribute a lot of capital gains—in your taxable account.
Consider this: There’s a saying: Don’t let the tax tail wag the investment dog. While this move may be right for you, it reminds us not to make moves to minimize taxes in your portfolio unless it aligns with your long-term investment strategy.
5. Contribute to or max out your retirement plan if you are able.
Contributing to a retirement account can lower adjusted gross income and taxable income. In 2023, the 401(k) contribution limit stands at $22,500, and if you are 50 or older, you can save an additional $7,500 in catch-up contributions for a total of $30,000. The IRA contribution limit totals $6,500 in 2023, with a catch-up contribution of an additional $1,000 for those 50 or over. And if your plan allows and you believe your income tax rates may be higher in retirement, you may also want to consider the Roth option. It doesn’t have to be one or the other—you can make contributions to both as long as the total contribution does not exceed the overall contribution limit. Be aware, however, that Roth accounts are funded with after-tax dollars, so those contributions won’t lower AGI.
Get started now.
As you review your financial picture, consider these five ideas to help you prepare your way to a successful tax season.
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