9 Tax Planning Tips for Year-End

As 2023 winds down, there’s still window of opportunity to review your financial position and make a few strategic moves to potentially lower your taxes. If you’re 50 or older, you’re at a pivotal stage where a few tactical moves can give a significant boost to your retirement. Here are nine tax planning strategies to consider before year-end.

1. Maximize Retirement Contributions

In 2023, if you’re 50 or older, you have the ability to make “catch-up” contributions to your retirement accounts. For 401(k)s, 403(b)s, most 457 plans, and the federal government’s Thrift Savings Plan, you’re allowed to contribute an additional $6,500 on top of the standard $20,500 limit. For IRAs, the catch-up contribution is an extra $1,000 above the $6,000 limit this year.

If you expect to have a relatively high-income year, you may want to consider directing more of your December paycheck into these tax-deferred accounts. Not only will you increase your savings, you’ll lower your taxes.

If you have both a traditional IRA and a Roth IRA, consider which account to prioritize. Traditional accounts provide a tax deduction this year, whereas Roth accounts offer tax-free growth and withdrawals in retirement. If you think you might be in a higher tax bracket in retirement, contributing to a Roth may be more beneficial, but that is typically less common.

2. Consider Tax-Loss Harvesting

Review your after-tax investments for anything that have lost value this year. By selling investments at a loss, you can offset any other capital gains you may have realized.

If your losses exceed your gains, you can deduct up to $3,000 against other income, with any remaining losses carried forward to future years.

3. Take Required Minimum Distributions (RMDs)

If you’re over age 72, don’t forget to take your annual required minimum distribution (RMD) from your retirement accounts! There’s a heavy penalty if you don’t.

If you haven’t started your RMDs yet, it’s important to start thinking about your strategy now. The time between retirement and your RMD age typically presents an opportunity to make strategic Roth IRA conversions at a lower tax rate. This will reduce the amount you have in tax-deferred accounts – and could lower your lifetime tax bill significantly.

4. Review Your Health Savings Account (HSA)

If you’re currently enrolled in a high deductible healthcare plan, you’re eligible to contribute to a Health Savings Account (or HSA). For 2023, the contribution limits are $3,650 for individual coverage and $7,300 for family coverage, with an additional $1,000 catch-up contribution for those who are 55 and older.

HSAs offer triple tax benefits: tax-deductible contributions, tax-free growth, and tax-free withdrawals for qualified medical expenses. There’s still time to make a contribution in December.

And, of course, you may still have the ability to change to a high-deductible plan in 2024 through open enrollment – allowing you access to an HSA next year. However, please consider your health insurance first needs before choosing a high-deductible plan.

5. Assess Itemized Deductions

If your itemized deductions are close to the standard deduction threshold, consider “bunching” deductible expenses into one year to surpass the standard deduction and lower your tax bill.

This could include charitable contributions, medical expenses, property taxes, or state and local taxes. You may be able to push your deductions over the standard deduction limit.

6. Charitable Contributions

Going further with itemized deductions, those who are charitably inclined may want to consider a Donor Advised Fund before year-end. If you’re having a high-income year, you can receive a charitable deduction for anything you contribute to a Donor Advised Fund for this year’s taxes.

Once you’ve moved assets into a Donor Advised Fund, it acts as a sort of charitable trust. You can invest your contributions and distribute them over time well into the future.

Anyone 70-½ or older can make a Qualified Charitable Distribution (QCD) from an IRA directly to a qualified charity. The QCD can satisfy your RMD for the year and isn’t included in taxable income. Even you haven’t reached RMD age yet, planning for QCDs can benefit future tax years.

7. Consider Roth Conversions

If you expect your tax rate to be higher in retirement – or if you’re currently in your retirement “gap years”, you may want to convert a portion of your traditional IRA to a Roth IRA. You’ll pay taxes on the amount you convert at your current tax rate but enjoy tax-free growth and withdrawals later.

However, this does increase your taxable income for the year, so it’s important to assess the potential impact on your current tax bracket. Typically, you’ll convert an amount that will take you up to the top of your current tax bracket.

8. Plan for Social Security Benefits

If you’re approaching Social Security eligibility, it’s time to think about how your benefits will impact your taxes. Up to 85% of Social Security benefits can be taxable depending on your income level.

Strategies to minimize taxes on benefits include income spreading or utilizing Roth accounts. There are a lot of factors at play here, however. Roth conversions may increase your taxable income – and also increase your IRMAA penalties.

Speaking of Roth conversions, delaying your Social Security benefits will also increase the number of “gap years” between retirement and your RMD age, allowing you more tax planning opportunities.

9. Update Your Estate Plan

Year-end is a great time to review your estate plan. Ensure your wills, trusts, Financial Powers of Attorney, and Advanced Directives for Healthcare are up-to-date. Don’t forget about your beneficiary designations for your retirement accounts and life insurance policies!

Small Moves, Big Payoff

The end of the year is a great time to take stock of your financial health and prepare for the new year. With these strategies, you can maximize your tax efficiency and set yourself up for a more comfortable retirement.

These seemingly small tactical moves can potentially lower your lifetime tax bill by hundreds of thousands of dollars! So, don’t let the opportunity pass you by. Of course, always consult with your tax professional and financial advisor to ensure these strategies are right for your personal circumstances.

If you need help lowering your lifetime tax bill, then click here to set up a quick, complimentary introduction call to see if Prana Wealth is a good fit. We do still have the capacity to take on new clients.

As a fee-only financial advisor in Atlanta, we can (and do) work virtually with clients all across the U.S. and we’re here to help you when you’re ready.

Prana Wealth Management LLC (“Prana Wealth”) is a registered investment advisor offering advisory services in the State of Georgia and in other jurisdictions where exempted. Registration does not imply a certain level of skill or training. The presence of this website on the Internet shall not be directly or indirectly interpreted as a solicitation of investment advisory services to persons of another jurisdiction unless otherwise permitted by statute. Follow-up or individualized responses to consumers in a particular state by Prana Wealth in the rendering of personalized investment advice for compensation shall not be made without our first complying with jurisdiction requirements or pursuant to an applicable state exemption.
All written content on this site is for information purposes only. Opinions expressed herein are solely those of Prana Wealth, unless otherwise specifically cited. Material presented is believed to be from reliable sources and no representations are made by our firm as to other parties’ informational accuracy or completeness. All information or ideas provided should be discussed in detail with an advisor, accountant, or legal counsel prior to implementation.
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