Even though tax season is right around the corner, it’s not too late to make strategic decisions that can significantly influence your tax situation for the previous year. We’ll delve into several specific strategies. By implementing multiple approaches, you may even find yourself in a lower tax bracket.
1. Maximize Your IRA Contributions
Contributing to an IRA is a dual-benefit strategy—bolstering your retirement savings and potentially offering tax relief. The IRS allows contributions to be made to your IRA for the previous year until April 15, presenting a valuable opportunity to increase your savings while reducing your taxable income for those contributing to a Traditional IRA. Roth IRA contributions, while not tax-deductible, offer tax-free growth and withdrawals, making them a key component of retirement planning. Even if your income is too high to directly contribute to a Roth IRA, you can still contribute using a Backdoor Roth IRA. With the 2023 contribution limits set at $6,500 ($7,500 for age 50 and older), fully funding your IRA can significantly impact your long-term financial health and immediate tax situation.
2. Fully Fund Your Health Savings Account (HSA)
HSAs offer a triple tax advantage—contributions are tax-deductible, growth is tax-free, and withdrawals for qualified medical expenses are also untaxed. This makes HSAs an exceptional tool for reducing your taxable income and planning for future healthcare costs. Recognize that your HSA may be your best retirement account. The 2023 contribution limits of $3,850 for individuals and $7,750 for families, with an additional $1,000 for those 55 and older, mean that maximizing your HSA not only prepares you for medical expenses but also lowers your current tax liability. Remember, the deadline to contribute for the previous year is April 15 so you still have time to act.
3. Employ Tax-Loss Harvesting
Market fluctuations can create opportunities for tax-loss harvesting—selling investments at a loss to offset taxes on both gains and income. You can use this proactive strategy by itself or as part of your regular process to reset your asset allocation to align with your long-term financial goals. By carefully reviewing your portfolio and identifying underperforming assets, you can strategically realize losses, thereby reducing your taxable income. To realize the tax benefits for 2023, you need to have harvested losses by December 31. Since many investors are busy and forget to harvest in December, now is a great time to review your portfolio if you didn’t do so earlier.
4. Qualified Charitable Distributions (QCDs)
For those aged 70½ or older, QCDs provide a unique opportunity to satisfy Required Minimum Distributions (RMDs) by directly transferring funds to a qualified charity. This move fulfills not only your philanthropic desires but does so in a tax-efficient manner, as the distribution counts towards your RMD without being added to your taxable income. For many retirees, their RMDs exceed their normal living expenses so donating part of their RMD to charity both reduces their tax burden while supporting charitable causes. For a QCD to count toward this year’s RMD, the funds must come out of your IRA by your RMD deadline, which is generally December 31.
5. SEP IRA or Solo 401(k) Contributions for the Self-Employed
Self-employed individuals have distinct opportunities to save for retirement while optimizing their tax situation through vehicles like SEP IRAs and Solo 401(k)s. These plans offer not only generous contribution limits (up to $66,000 in 2023; solo 401(k)s also allow those age 50 or older to contribute $7,500 more) but also provide tax deductions for contributions, serving as an effective way to reduce taxable income. These plans offer flexibility and high contribution limits, making them essential tools for self-employed professionals aiming to secure their financial future while managing current tax liabilities. While the employee contribution must be made by December 31, employer contributions for a given year can be made up until the due date of the business’s income tax return for that year including extensions to be considered deductible for the year.
By considering these strategic options and taking proactive steps before filing your tax return, you may reduce your tax burden for both last year and this year. We recommend you review each of these strategies annually to take best advantage of the tax savings opportunities.