End of Tax Year Strategies

“Year-end tax planning is like a game of chess; to be successful, you must anticipate your opponent’s moves and position your pieces strategically to minimize your tax liability.” That’s the advice of an anonymous source. Luckily there’s better — and more specific — advice to help reduce your taxes in 2023 and to plan for 2024.

Maximize Your Retirement Contributions

This is an easy and obvious place to start for 2023 and to do every year. More specifically:

• Contribute to your company’s traditional 401(k) plan, which is pretax for federal income tax purposes. You can contribute the lesser of your total compensation, up to $22,500 for 2023, with an additional “catch-up” contribution of $7,500 if you’re 50 or over.
• If your company matches a percentage of your 401(k) contribution, take advantage up to that full percentage. It’s like “free” money.
• If a company plan is not an option, set up an IRA. Traditional tax-deferred IRA contributions can be made up to the greater of your total compensation, but not to exceed $6,500. Again, an additional $1,000 “catch-up” contribution is available for those 50 or over.

Maximize Itemizable Expenses

If you’re unsure whether to take the standard deduction or itemize on your 2023 return, here are some common itemizable expenses you may be able to accelerate before the end of the year to tip the scales. Start with your charitable contributions.

• If you’re considering cash donations in 2023 and 2024 to your favorite charity, combine both year contributions and make them in 2023 to maximize your itemized expenses for tax year 2023.
• Use a credit card to make a donation by year-end and not pay the balance until your next payment cycle, while still taking the itemized deduction in 2023.
• Clean out your closet and donate to Green Drop or Goodwill. The “It’s Deductible” app can capture the fair market value
  of each item. Surprisingly, those donations add up quickly, plus you purge unwanted items. Remember to keep your donation receipt.
• If you’re in the higher long-term capital gain bracket of 20%, consider donating appreciated investments instead of cash. If you’re able to itemize, donations of publicly traded shares owned over a year result in a donation equal to the full current market value of shares at the time of gifting. Plus, if you donate shares worth more than you paid for them, you avoid the capital gains tax that would result from their sale.

Manage Investment Gains and Losses

If you have taxable brokerage investment accounts, consider certain tax planning opportunities.

• For capital losses that were recognized earlier in the year or capital loss carryovers from prior years, selling appreciated shares before year-end will eliminate or reduce your overall tax liability.
• If your income is too high to benefit from the 0% capital gain rate, but you have children or grandchildren who may be in that bracket, then gift appreciated shares to them. They can sell the shares at the lower tax rate and pay for some of their education expenses. Note: This strategy is subject to the Kiddie Tax Rules for those under 24.

Plan Ahead for Benefit Enrollment

While it may be too late to take advantage of some 2023 strategies, think about next year. Consider either enrolling in your company health flexible spending account (FSA) or health savings account (HSA). FSA accounts use pre-tax dollars to reimburse qualified medical expenses up to the $3,200 for costs like your annual doctor visit copays, dental, vision and prescriptions.

Another option is to enroll in your company high-deductible health plan (HDHP) and establish a pre-tax health savings account (HSA), which is usually provided by your employer. Qualified medical expenses can be paid with pre-tax money from HSA contributions. The annual pre-tax contribution limit in 2024 for individual coverage under a HDHP is $4,150 and $8,300 for an individual with family coverage.

These are just a few tax-savings ideas. Consult your tax advisor for other year-end opportunities and 2024 planning. And, checkmate!

Melissa Hawes, CPA, CGMA, is licensed as a certified public accountant in PA and NY and is head of Miles Financial Management, founded in 2003 and named after her son. Her team provides financial accounting and tax guidance to businesses and individuals, with expertise ranging from basic accounting and tax management services to more in-depth services such as outsourced chief financial officer/controller services. Located in Malvern. MilesFinancialMgt.com.