🔎 Tax Day may still be months away, but there are many steps you can consider before then that will help manage your bill. In fact, certain tasks should not, in some cases cannot, wait until next year, lest you miss out on potentially important opportunities.
Here are the top tasks you should consider before December 31, and the ones you have until Tax Day, April 15, 2024, to accomplish.
📌Tasks to consider before the end of the year
– Take Required Minimum Distributions (RMDs): If you are age 73 or older, you generally must take minimum distributions from your tax-deferred retirement accounts before year-end. If you miss the deadline, you could be subject to a 25% penalty on the portion of your RMD you didn’t withdraw.
– Maximize your 401(k): Contributing the maximum amount to your tax-deferred employer-sponsored retirement plan can help reduce your taxable income for the current year. In 2023, the maximum contribution for 401(k) and similar plans is $22,500 ($30,000 if you are age 50 or older).
– Contribute to a Roth 401(k) plan: If your company offers this option and has not exhausted its traditional 401(k) plan, you can make after-tax contributions to a Roth 401(k) plan up to the $22,500 limit ($30,000 if you are age 50 or older), minus whatever you contributed to your traditional 401(k) plan before the end of the year.
– Consider a Roth conversion: If your income exceeds the contribution limits for a Roth IRA, you can convert pre-tax savings from a traditional IRA to a Roth IRA to withdraw the funds tax-free during retirement.
– Consider a Roth mega-conversion: If your workplace retirement plan allows it, a so-called Roth mega-retro-conversion helps high-income earners save in a Roth account, avoiding Roth IRA income limits and the tax consequences of a regular Roth conversion.
– Optimize your giving: If charitable giving is part of your financial plan, act before the end of the year to make sure your giving is efficient. Let’s take a look:
- Charitable Giving: You can deduct cash gifts to qualified charities worth up to 60% of your adjusted gross income (AGI), which is your total gross income minus certain deductions.
- Qualified Charitable Distribution (QCD): If you are age 70½ or older, in 2023 you can give up to $100,000 to a charity directly from your IRA through a QCD. You won’t get a tax deduction for the gift, but the amount donated can be used to satisfy all or part of your RMD without adding it to your taxable income.
– Exercise nonqualified stock options (NSOs): If your company issues NQSOs, which are taxed as ordinary income when exercised, waiting until the end of the year allows you to exercise just enough to be within your tax bracket.
– Take advantage of losses: The end of the year is a good time to make sure your portfolio remains aligned with its objectives. By rebalancing, you can reduce your tax liability by offsetting realized capital gains against your losses. To employ this strategy, calculate your gains and then remove losing positions of equal value. If you have more losses than gains, you can offset up to $3,000 of ordinary income. If you resort to tax loss offsetting, make sure you don’t buy the same or a similar security within 30 days to avoid the pitfalls of the “washout” rule.
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🛑Things to keep in mind before Tax Day
Take full advantage of all other tax-deferred savings accounts: money set aside in these tax-advantaged accounts can potentially help reduce taxable income, and with these, you’ll have until Tax Day to make contributions for the previous tax year.
📕 For 2023, the maximum contributions are:
- Health Savings Accounts (HSAs): $3,850 for individuals ($4,850 if age 55 or older) and $7,750 for families ($8,750 if age 55 or older). HSAs offer many tax advantages, such as tax-free earnings and withdrawals (when used for qualified medical expenses) and, if you itemize expenses, you can deduct after-tax contributions.
- Traditional IRAs: Up to $6,500 ($7,500 if you are age 50 or older). However, if you or your spouse are covered by a company retirement plan, contributions to a traditional IRA may not be fully tax-deductible and deductions may be phased out.
- Contributing to a Roth IRA: Contributions are made with after-tax money, so they won’t help you reduce your taxable income. However, once you reach retirement, all contributions and earnings can be withdrawn tax-free if you have held the account for five years and are age 59½ or older, and Roth IRAs are not subject to RMDs.
However, you cannot contribute to a Roth IRA if your income exceeds $153,000 ($228,000 for married couples), and the contribution limit phases out for those with income between $138,000 and $153,000 ($218,000 and $228,000 for couples).
📝One last thought 🔍
In 2023, you will be able to gift up to $17,000 ($34,000 if married) per person to an unlimited number of people without affecting your lifetime exemption from estate and gift tax. This will not reduce your taxable income for the year, but will allow you to strategically transfer wealth to your heirs tax-free.
If you want to know more about the different options you have to deduct taxes, don’t hesitate to contact us at info@wavetax.us
✅ At Wave Tax and Financial Solutions we are here to help you organize your finances 💯