While tax season may appear distant, the IRS will commence accepting 2023 tax returns in just three months. If you aim to reduce your tax liability or enhance your refund, there exist highly effective strategies that can potentially save you hundreds or even thousands of dollars. Here are four specific tactics you can employ from now until the year’s end, offering opportunities for immediate savings, long-term financial planning, and more.
It’s essential to note that tax-loss harvesting may not be a prudent choice in every circumstance. If you maintain a long-term belief in an investment, lowering your tax liability alone may not be a compelling reason to sell. However, if you have been contemplating divesting from certain stocks, this strategy presents an opportunity well worth considering.
Maximizing Tax Benefits with Charitable Donations
If you choose to itemize deductions on your tax return, you have the opportunity to deduct your contributions to eligible charitable organizations. While it’s advisable to distribute your donations throughout the year, making extra contributions towards the end of the year can yield substantial tax advantages (while also providing a seasonal financial boost to the charitable organizations you support).
It’s worth noting that your donation need not be limited to cash. You could declutter your wardrobe by donating unused clothing to local organizations like the Salvation Army or similar thrift stores. If you received a new TV as a holiday gift, consider donating your old one. The key is that there are diverse ways to contribute. Just remember to obtain a receipt, allowing you to deduct the fair market value of the items you donate.
Workplace Retirement Plans and Tax Savings
When it comes to your retirement savings, the timing can significantly impact your tax situation. If you possess a traditional or Roth IRA, you have until the April 2024 tax deadline to make deductible contributions for the year 2023, so there’s no immediate urgency.
However, if your retirement savings are tied to a 401(k), 403(b), or another qualified employer-sponsored plan, it’s essential to note that the end of the calendar year marks the cutoff for elective deferrals.
For the tax year 2023, the maximum elective deferral limit for employees stands at $22,500, or $27,000 if you’re aged 50 or older. While it may not always be feasible (or necessary) to reach the maximum limit, boosting your contribution rate in the last few months of the year can yield dual benefits. This not only saves you money on taxes but also better positions you for a more financially secure retirement in the future.
Harnessing the Benefits of Health Savings Account Contributions
If you are enrolled in a qualifying high-deductible health plan, whether provided by your employer or as a self-employed individual, you have the opportunity to make contributions to a Health Savings Account (HSA).
The HSA stands out as an exceptional savings tool, boasting a unique triple tax advantage. Your contributions can be tax-deductible, the funds within the account can be invested, and any withdrawals made for healthcare expenses remain entirely tax-free. Unlike a Flexible Spending Account (FSA), any unspent money in your HSA can roll over from one year to the next.
What makes it even more attractive is that once you reach the age of 65, the funds in your HSA can be used for any purpose. So, while it serves as an effective means to budget for healthcare expenses, it can also serve as a supplementary retirement savings plan.
For the year 2023, eligible individuals can contribute up to $3,850 to their HSA for single healthcare coverage or $7,750 for family coverage, with an additional $1,000 catch-up allowance if you are aged 50 or older.
Optimizing Your Investment Portfolio with Tax-Loss Harvesting
Given the performance of the stock market in 2022 and 2023, it’s reasonable to assume that many individuals have investments in their portfolios that are currently valued lower than their initial purchase price. If you find yourself in this situation, exploring a tax-loss harvesting strategy could prove to be a valuable option.
In essence, tax-loss harvesting involves selling an investment at a loss, which allows you to offset any capital gains you’ve incurred during the year. For example, if you sold an investment earlier in the year with a $5,000 gain and subsequently sell another stock at a $4,000 loss, it effectively reduces your taxable capital gain to $1,000. In the absence of capital gains, you can apply this strategy to lower other taxable income by as much as $3,000.