Writing a big check to the IRS or getting a skimpy refund on Tax Day not your idea of a good time? Now's the time to act. Moves you make in the waning days of 2023 and up until April 15, 2024 can help you pay less tax.
Whether you're an investor, gig worker, retiree or just someone who abhors taxes, taking advantage of some last-minute tax-savings tips before New Year's Day or next year's tax filing deadline can save dough.
"There's still plenty of time," said Mark Steber, chief tax information officer at Jackson Hewitt, a tax preparation service.
Ways To Pay Less Tax Before Dec. 31: Delay Income
Your first move to pay less tax now? Defer income. Uncle Sam taxes income in the year it's received. Now's the time to push out pending income into 2024, if possible.
Freelancers or self-employed workers, for example, can hold off on sending invoices out until the final day in December or the start of the New Year.
Workers eligible for a year-end bonus or commission check can ask employers to defer payment until early next year. "If your boss is able to pay you your bonus in January, you will still receive it close to year-end, but you won't have to pay taxes on it when filing your taxes this April," said Lisa Greene-Lewis, CPA, and tax expert at Intuit's TurboTax.
Similarly, investors thinking of selling a stock, bond or fund that will boost income in the form of capital gains or dividends should instead consider placing the trade on the first trading day of 2024.
Accelerate Deductions To Pay Less Tax
If you're itemizing on your income tax return, increase tax deductions before year-end to lower your taxable income, Steber advises. This strategy is most useful if the accelerated deductions you take boost your total deductions above the standard deduction of $13,850 for single filers and $27,700 for joint filers.
Homeowners, for example, may consider making their January 2024 mortgage payment or first-quarter 2024 property tax payment before year-end 2023 to boost the dollar amount of home-loan interest they can deduct on their return. Stockholders can donate appreciated stock they've owned for more than a year to a charity. They can deduct the market value of the securities on the day of the gift as well as avoid paying capital gains on the gains.
Independent contractors can load up on needed office or business supplies, such as a new PC, printer or office furniture. "Make sure you collect and organize all your business-related expenses and deductions because that can really help you lower your bottom line (and what you pay in taxes)," said Greene-Lewis.
Optimize Your Giving To Charities
If you're the charitable type, boost the size of your gifts to charities by year-end and increase the amount of your itemized deductions and reduce your taxable income.
In general, you can deduct cash donations to qualified charities worth up to 60% of your adjusted gross income (AGI), according to Charles Schwab.
Owners of traditional IRAs who are 70-1/2 or older, for example, can use a qualified charitable distribution, or QCD, to donate up to $100,000 directly to one or more charities from their IRA. The big benefit of a QCD? The gifted amount can be used to satisfy all or part of the taxpayers' required minimum distribution (RMD), says Steber.
Avoiding the RMD payout, which is now required starting at age 73, means the taxpayer can skip incurring more taxable income or being pushed into a higher tax bracket. They can also avoid missing out on other tax deductions. "I really like this type of charitable deduction for elder seniors," said Steber.
Donating assets that have risen in value is tax efficient because you don't get hit with capital gains and you can receive a tax deduction for the full fair-market value of the donation (up to 30% of your AGI), according to Charles Schwab.
Sell Your Stock Losers To Offset Gains
Clunker stocks with big losses that you bought could still save you money in taxes — if you sell them. It's called tax loss harvesting. You can offset any realized stock capital gains with your losses. If your losses exceed your gains, you can offset $3,000 of ordinary income. Any additional losses carry over into future years.
"Sell the stocks that are down or losers that have been gathering dust and take those losses and enjoy the tax benefits," said Steber.
Say, for example, you were lucky enough to turn a $10,000 investment in AI chipmaker Nvidia into a $22,100 gain this year through Dec. 11. But were unlucky enough to also make $10,000 investments in three of the S&P 500's top losers, such as SolarEdge, down 72%, Enphase Energy, down 60.9%, and drugmaker Moderna 54.4%. The total losses of those three stocks are roughly $19,000 combined. So, by selling those three laggards you'll be able to offset nearly all your Nvidia gains. A married couple in the 32% tax bracket would save roughly $6,080 in taxes by harvesting their losses.
Steber says investors should also make sure they get the cost basis right on assets they sell, whether it's a stock or a home. An asset's cost basis is the original value you paid for it, adjusted for factors such as improvements or reinvested dividends or capital gains. The IRS uses cost basis to determine how much profit you made. If you mistakenly underreport your cost basis, you're giving money away to the IRS.
Max Out Your Retirement Plans To Pay Less Tax
You can pay less to Uncle Sam in taxes by maxing out your 401(k), or at least contributing as much as you can, by year-end. "Contributing to your retirement savings account is a great way to reduce your taxable income while building your nest egg," said Greene-Lewis. Pretax dollars fund a traditional 401(k). So, the more you sock away, the lower your taxable income for the calendar year will be. The 2023 contribution limit is $22,500 and $30,000 for those 50 and older.
Given the digital nature of many 401(k) plans, there might still be time to go to your workplace benefits website and boost the percentage (and dollar amount) of pretax earnings you want taken out of your paycheck for your 401(k) in your final paycheck of the year.
"If you're still able, you can log on to your HR website and make a few election changes for the next payroll cycle," said Steber. "It can have an impact." Diverting an extra $2,000 into your 401(k), for example, equates to a $480 tax savings for those in the 24% tax bracket.
Score The Saver's Credit
And for retirement savers filing single returns with incomes below $36,500 and married couples filing jointly who earn $73,00 or less, don't forget to take advantage of the so-called Saver's Credit. This tax credit can be worth up to $2,000, depending on your income and how much you save in your retirement plan, adds Greene-Lewis.
Take your required minimum distributions (RMDs). Don't be a rule breaker, as it could be costly. Case in point. Make sure if you're 73 or older to not forget to take your RMD from your tax-deferred retirement accounts before year-end. Why? If you miss the deadline the IRS could subject you to a 25% penalty on the amount of your RMD you failed to withdraw, according to Charles Schwab.
Ways To Save On Taxes Before April 15, 2024
If you're not able to max out your tax-friendly IRA or your health savings account (HSA) if you have a high-deductible health plan by year-end, don't despair. You have until Tax Day filing deadline day next year to fully fund these accounts, says Greene-Lewis. For 2023, you can contribute up to $6,500 in an IRA ($7,500 if you are 50 or older). HSA contribution limits for 2023 are $3,850 for single coverage and $7,750 for families. Those 55 or older can contribute an additional $1,000.
And for self-employed folks, which includes freelancers, who earn sizable incomes, consider contributing to a SEP-IRA, or Simplified Employee Pension Plan, Greene-Lewis advises. The reason: SEP-IRAs have much higher contribution limits, which can allow you to lower your taxable income by a sizable amount. The IRS allows SEP-IRA account holders to contribute up to the lesser of 25% of your net self-employment income or $66,000. "That's much more generous than a traditional IRA," said Greene-Lewis.
And if you made any energy-efficient improvements to your home in 2023, don't forget to take advantage of any tax credits or offsets available to you via the Inflation Reduction Act. "The credit amounts have increased to up to $3,200 for energy-efficient home improvements," said Greene-Lewis.
