Year-end is not only the season for holiday festivities. It’s also a good time to consider strategic moves to help optimize your tax situation. Taking advantage of various tax-saving opportunities before Dec. 31 can lower your tax liability and help you keep more of your hard-earned money.
So, here are some key tax strategies to consider before you ring in the new year.
Before year-end: Take your RMD
If you're 73 years or older, remember to take the required minimum distributions (RMDs) from your tax-deferred retirement accounts by the end of the year. However, keep in mind that RMD rules have changed recently due to the SECURE 2.0 Act.
For example, the age for taking the required payouts moved from 72 to 73 for 2023, and penalties for failing to take required distributions have been reduced from a stiff 50% to generally 25% of the required distribution amount. (The RMD age delay doesn’t apply if you turned 72 in 2022).
The IRS has also delayed distribution rules and waived penalties for certain inherited IRAs. In any case, RMD timing, including delays, can impact your tax liability. So check with a financial advisor if you’re unsure when to take your required distributions and how much.
Related: One Key Rule for Understanding Your 2023 RMD
Maximize retirement contributions
One way to reduce your taxable income for the current year, if you are still working, is to contribute the maximum amount to your employer-sponsored retirement savings plan. The deadline for making 401(K) contributions is Dec. 31.
- (If you’re contributing to an IRA, the deadline is Tax Day in April 2024.)
- For 2023, the maximum contribution amounts for 401(k)s and similar plans are $22,500 and $30,000 if you're 50 or older.
If you have access to a Roth 401(k) option, you can make after-tax contributions up to the $22,500 limit ($30,000 if you're 50 or older). Designated Roth accounts in a 401(k) or 403(b) plan are subject to RMD rules for 2023. However, beginning in 2024, distributions from designated Roth accounts will no longer be required.
If you have a flexible spending account (FSA) for health care expenses, you may have to use the funds by Dec. 31. However, check to see if your employer has implemented a carryover amount or grace period for your account.
Related: Max Your 401(k) Contributions Before the Dec. 31 Deadline
Make charitable donations
If charitable giving is a part of your financial plan, make your donations before the year ends. If you itemize, you can deduct cash donations to qualified charities worth up to 60% of your adjusted gross income (AGI). Make sure to get receipts from charitable organizations, and beware of fake charities.
Some taxpayers donate appreciated long-term assets via a donor-advised fund. By doing so, they can receive a tax deduction for the full fair market value of the donation (up to 30% of AGI).
If you're 70½ or older, you can donate up to $100,000 directly from your IRA to a charity using a qualified charitable distribution (QCD). While you won't receive a tax deduction for the donation, the amount can satisfy all or part of your RMD without increasing your taxable income. This option is only available with IRAs, and there are rules and restrictions, so consult a trusted tax professional before making any moves.
Also, remember the annual gift tax exclusion, which allows you to give up to $17,000 per person this year without worrying about paying gift tax. Another upside is that the recipients of your up to $17,000 gifts also won’t be taxed on the amount.
Related: The Tax Deduction for Charitable Donations
Harvest tax losses
Evaluate your investment portfolio to ensure it aligns with your financial objectives. If you have experienced losses due to market fluctuations, those might be used to offset capital gains you may have realized during the year. This strategy is known as "tax loss harvesting." You can offset up to $3,000 of ordinary income, which can reduce your overall tax burden.
However, don’t forget the wash sale rule, which, if triggered, can result in the IRS disallowing your losses. A wash sale occurs when you sell a security at a loss and then purchase the same or substantially identical security again in a short period (i.e., 30 days before or after you sold the declining stock).
Related: The Wash Sale Rule: Six Things to Know
New Year's Eve 2023: Resolve to be tax-ready for 2024
Year-end is also an opportunity to resolve to stay ahead of your financial situation for a smooth tax season in 2024. Start by organizing all your tax-related documents, and consider finding a new tax preparer (if you didn't have a good experience with the one you used last year). Consider any significant changes you plan to make in the coming year that might affect your taxes.
Also, consult with a financial adviser or tax professional to customize strategies that suit your financial situation.
But don't wait until the last minute on New Year’s Eve. If you haven’t already, implement some end-of-year tax strategies today.
Note: This item first appeared in Kiplinger Retirement Report, our popular monthly periodical that covers key concerns of affluent older Americans who are retired or preparing for retirement. Subscribe for retirement advice that’s right on the money.
