There’s only a month and a half until 2023. Are you ready? With just a few short weeks and several holidays on the way, time is short to make the most of your tax situation, but this is the time of year to do it. Here are our top year-end tips for minimizing your taxes:
Review the impact of big life changes
If you’re about to experience a big life change, now is a great time to review how it may change your tax situation. Getting married, having children, getting divorced, changing jobs, moving, retiring and other big life events often change your tax situation—sometimes in unexpected ways. Give some extra thought to this year and how your tax situation may change next year.
Complete a new W4
The IRS Form W4 is the form that you submit to your employer to determine how much income tax should be withheld from your paycheck. If you have steady income each year, you probably don’t need to update it. However, if you received a surprise bonus or changed jobs, you may benefit from updating your withholding amounts, especially if you regularly have other additional income and you’ve had to make extra payments at tax time. See https://www.irs.gov/pub/irs-pdf/fw4.pdf
Increase your 401(k) or 403(b) contributions
Everyone knows they should save more for retirement but increasing your pre-tax contributions to your 401(k), 403(b) or IRA can also help you reduce your current tax bill. I suggest that you make the increase your annual birthday present to yourself (or do it every year at the beginning of the year). An increase of one percentage point over your current contribution adds up and can have a compounding effect over many years.
Consider a Roth IRA conversion, especially this year
With stock and bond values down a lot so far this year, converting a pre-tax retirement account to a Roth (after-tax) could be especially beneficial. If you convert an account with a lower value, the tax due should be less on the conversion. By converting to a Roth now, you can diversify your tax obligations so that at retirement, your withdrawals are tax-free instead of all taxable. Roth conversions have several rules and don’t make sense for every investor. But you may find that it works for your situation.1
Sell stocks or bonds to book losses
If you have holdings with unrealized losses—as many investors do this year—selling the holdings before the end of the year can result in losses that you can report on your tax returns. This “tax loss selling” can work if you sell the securities today and stay out of “substantially similar securities” until after 31 days have passed. This allows you to book the losses on your tax return. You can also use those losses to offset sales of other securities that have gains. This can help you reduce the amount of future taxes that would otherwise be due when you sell those appreciated securities in the future.
Gift shares of highly appreciated stock
Don’t have any losses but a few stocks with big gains? Try giving some shares to a family member who is in a low tax bracket. If you were planning to give money to one of your kids or a family member, giving highly appreciated stock eliminates your tax liability. For some low income recipients (think recent college graduates or people working low income professions such as teachers), if their income is low enough, they may not owe any capital gains tax at all. Another gifting strategy is to gift shares to a qualified charity instead of selling the stock and giving cash. By gifting shares “in kind” you may be able to get the tax deduction, avoid paying capital gains taxes, and avoid boosting your income.2
Defer income / accelerate deductions
If you are expecting a big year end bonus (we can always be hopeful, right?), see if your employer will defer it into next year. If not, consider accelerating some tax-deductible items into this year to help offset the extra taxable income. By shifting income and deductions from one tax year to the next, you may be able to avoid paying more tax than necessary.3
Shop for a new tax preparer now
We often get calls and messages in February and March (and sometimes April) saying this is the year that they’d like to change tax preparers. Guess when tax preparers are busiest? –February, March and April. If you want to have a meaningful conversation with a potential new tax preparer, now is the time. Between mid-October and mid-December is one of the slowest times of the year for most tax preparers. They are around and available to talk about their services, who they serve and what their services cost. If you would like some recommendations, give me a call and I can suggest a tax professional that is a good match for your needs.
Review your health insurance expenses and plan options
If your health needs or costs are expected to change next year, fall open enrollment is the time to make the change. While your health plan may have been fine up to now, a change in your health care needs or usage may mean that a different plan can provide better coverage or lower out-of-pocket expenses. While High Deductible Health Plans (HDHP) are increasingly popular with employers and employees, they can be costly if you have existing health conditions that require frequent doctor visits, treatments, or prescription drugs. We suggest reviewing plan options and your actual out-of-pocket costs, including health insurance premiums, every year.
Complete required minimum distributions
If you are age 72 or older or have inherited an IRA, you will have to take a Required Minimum Distribution (RMD) from your IRA before the end of the year. If you skip it or don’t take the full RMD amount, the penalties are severe—the IRS penalty is 50% of the amount you should have taken. Unfortunately, we’ve met a few people who did not know or understand the rules and had to pay this penalty. Don’t wait until December 31st to take your distribution. It's your money; let’s keep it that way.
This is a partial list of year end tax saving tips. If you have additional questions about saving or planning your taxes, see your tax professional or, give me a call. We’ll get you the answers you need to wrap up the year. You can schedule a quick call with me by clicking HERE.
Lyman H. Jackson
· Managing capital gains: Making the most of a down market https://planwithfps.com/blog/managing-capital-gains-making-the-most-of-a-down-market · Make giving pay: Using your IRA to make charitable gifts https://planwithfps.com/blog/make-giving-pay-using-your-ira-to-make-charitable-gifts · Avoiding a surprise tax bill https://planwithfps.com/blog/avoiding-a-surprise-tax-bill
1Roth conversions do not make sense for everyone. Conversions are most beneficial if you have separate cash to pay the tax that is due on the conversion.
2 To claim charitable tax deductions, you must have enough deductions to itemize them. 3 Not all income or itemized deductions can be shifted from one year to another, but some can be shifted. 3.If you are currently taking the standard deduction, you may want to consider “bunching” deductions into this year to be eligible to itemize deductions.
Financial Planning Solutions, LLC (FPS) is a Registered Investment Advisor. FPS provides this blog for informational and educational purposes only. Nothing in this blog should be considered investment, tax, or legal advice. FPS only renders personalized advice to each client after entering into an advisory relationship. Information herein includes opinions and forward-looking statements that may not come to pass. Information is derived from sources believed to be reliable. Information is at a point in time and subject to change without notice. Such information may not be independently verified by FPS. Please see important disclosures link at the bottom of this page.