2023 Year-End Tax Saving Tips

2023 Year-End Tax Saving Tips for Reducing Taxable Income

As the year draws to a close, the time is fast approaching for making important decisions that may lower your tax bill for 2023. Whether you are an employee, a small business owner, or a retiree, there are many tax breaks that you can claim or maximize before the year is over.

To help you plan ahead to lower your tax liability, our tax professionals have compiled a list of the top year-end tax saving tips for 2023 to help reduce your taxable income.

2023 Year-End Tax Saving Tips

1. Maximize Your Contributions to Tax-Advantaged Accounts

One way to save taxes in 2023 is to contribute as much as possible to accounts that offer tax benefits, such as 401(k)s, IRAs, and HSAs. These accounts can reduce your taxable income, defer your taxes, or exempt your earnings from taxes, depending on the type of account and how you use it.

  • IRA contributions can be made until April 15, 2024, but workplace retirement plans have a December 31, 2023 deadline. Traditional contributions lower your taxable income, while Roth contributions offer tax-free withdrawals in retirement.
  • The total combined limit for traditional and Roth contributions is $22,500, plus $7,500 for catch-up contributions if you’re 50 or over.
  • HSAs are a tax-advantaged option for those with high-deductible health plans. HSA contributions lower your taxable income, and distributions are tax-free for qualified medical expenses. HSA assets can be carried over and used for future medical expenses.
  • The HSA contribution limit is $3,850 for self-only coverage and $7,750 for family coverage.

2. Harvest Capital Losses to Offset Capital Gains

Harvesting your capital losses means selling some of your investments that have lost value to offset the taxes you owe on your investments that have gained value. This strategy can help you lower your taxable income and save money on your year-end tax bill. 

Here are some tips on how to harvest your capital losses for 2023:

  • Review your portfolio and identify your unrealized capital gains and losses. Unrealized gains and losses are the changes in the value of your investments that you have not yet sold. You can only harvest your losses when you sell your investments and realize the losses.
  • Compare your short-term and long-term capital gains and losses. Short-term gains and losses are from investments that you held for one year or less, while long-term gains and losses are from investments that you held for more than one year. The tax rates for short-term and long-term gains are different, so you should try to match your losses with your gains of the same type. For example, if you have more short-term gains than losses, you should harvest some of your short-term losses to reduce your tax rate.
  • Sell your losing investments before the end of the year. You have to realize your losses by December 31, 2023, to use them for your 2023 tax return. You can use your losses to offset your gains dollar for dollar, up to the amount of your total gains. If your losses exceed your gains, you can use up to $3,000 of your excess losses to offset your ordinary income, such as wages or interest. If you still have leftover losses, you can carry them forward to future years indefinitely.
  • Avoid the wash sale rule. The wash sale rule prevents you from claiming a loss on a sale of an investment if you buy the same or a substantially identical investment within 30 days before or after the sale. If you trigger the wash sale rule, your loss will be disallowed and added to the cost basis of the new investment. To avoid this, you should wait at least 31 days before you buy back the same or a similar investment, or buy a different investment that is not substantially identical.

Note: It is important to consider the impact of harvesting your losses on your overall investment strategy. Harvesting your losses can help you save taxes, but it can also affect your portfolio allocation, diversification, and performance. Therefore, you should not always sell your investments solely for year-end tax reasons, but also consider your long-term goals, risk tolerance, and market outlook.

If you have capital losses for this year, then we invite you to contact us for a free consultation to find out if this is a good tax saving strategy for 2023 based on your particular situation.

3. Consider Itemizing Your Deductions

Itemizing deductions is a way of reducing your taxable income by listing and subtracting certain expenses that you incurred during the year. Itemizing deductions may lower your tax bill if the total amount of your deductions is greater than the standard deduction that applies to your filing status.

For the tax year 2023, the standard deduction for married couples is $27,700, and the standard deduction for single filers is $13,850.

There are five main types of itemized deductions, and if the total of these types exceeds the standard deduction, you may want to itemize. Generally, you can deduct medical expenses, home mortgage interest, state and local taxes, charitable contributions, and theft and casualty losses due to a federally declared disaster.

Some reasons to consider itemizing deductions for reducing your 2023 tax bill are:

  • You have large medical and dental expenses that exceed 7.5% of your adjusted gross income.
  • You paid state and local income, sales, or property taxes that exceed the $10,000 limit for the standard deduction.
  • You made charitable donations of cash or property that are eligible for deduction.
  • You have mortgage interest, investment interest, or other deductible interest expenses.
  • You have unreimbursed employee business expenses, casualty and theft losses, or other miscellaneous deductions.

4. Bunch Charitable Donations

Bunching charitable contributions is a tax strategy that consolidates your donations for two or more years into a single year so that you can exceed the standard deduction and claim the itemized deduction for your charitable giving. This can lower your taxable income and your tax bill for the year you make the donations, while you can take the standard deduction for the other years.

Here are two reasons why you should consider this 2023 year-end tax saving tip:

  • By bunching your donations into a single year, you can increase your chances of exceeding the standard deduction and benefit from the charitable deduction, which has no limit for cash donations to public charities.
  • Bunching your donations can also help you optimize your tax bracket and avoid the alternative minimum tax (AMT), which limits the benefit of some itemized deductions.

5. Take Advantage of Education Tax Breaks

If you are paying for higher education, then you may want to consider some education-related tax breaks that can lower your taxable income or increase your refund.

Here are some of the options you have:

  • The American Opportunity Tax Credit (AOTC) is a credit of up to $2,500 per eligible student for the first 4 years of higher education, based on qualified education expenses. The credit phases out for single filers with modified AGI above $80,000 and joint filers above $160,000. To maximize the credit, you may want to prepay the tuition for the first semester of 2024 before the end of 2023.
  • A 529 plan is a tax-advantaged account that allows you to save and invest for future education costs. Contributions to a 529 plan are not deductible at the federal level but may be deductible at the state level, depending on your state’s rules. There is no limit on how much you can contribute to a 529 plan, but the federal gift tax may apply if you exceed $17,000 in 2023 or $18,000 in 2024. You can also make a lump-sum contribution of up to 5 times the annual gift tax exclusion without triggering the gift tax, as long as you do not make any other gifts to the same beneficiary in the next 4 years.

You can use both the AOTC and a 529 plan for tax savings, as long as you do not double-count the same expenses. One of our tax advisors can help guide you through this process. Schedule your free consultation here.

6. Defer Income

Deferring income as a freelancer or self-employed individual is a tax strategy that allows you to postpone receiving or reporting income until the next year when you may be in a lower tax bracket or have lower tax rates. By deferring income, you can reduce your current taxable income and your current tax liability for 2023, while potentially increasing your future deductions and credits.

Here are some tax saving tips for deferring income at year-end:

  • You can defer income by delaying billing your clients until January 2024 so that you do not receive or report the income in 2023.
  • You can ask for smaller up-front payments for projects that span this year and next, and invoice the remaining balance in 2024.
  • You can deduct your business expenses in the year that you incur them, even if you do not pay them until the next year.

7. Donate Appreciated Assets

Donating appreciated assets is a tax strategy that allows you to give away property that has increased in value, such as stocks, bonds, or real estate, to a qualified charity and claim a deduction for the full fair market value of the property. By doing so, you can avoid paying capital gains tax on the appreciation and reduce your taxable income for the year of the donation.

Some benefits of donating appreciated assets for reducing your 2023 tax bill are:

  • You can deduct the fair market value of the property, which is generally higher than your cost basis, as long as you have held the property for more than one year.
  • You can bypass the capital gains tax that you would have to pay if you sold the property and then donated the proceeds.
  • You can donate up to 30% of your adjusted gross income (AGI) in appreciated assets to public charities, or up to 20% to private foundations.
  • You can carry over any unused deduction for up to five years, subject to the same percentage limits.

8. Gift a Loved One with Money or Property

Gifting a loved one can help reduce your 2023 tax bill by lowering your taxable estate and using your annual and lifetime gift tax exclusions. By giving away money or property to your family or friends, you can reduce the size of your estate and avoid paying estate tax on those assets when you die.

Here are some reasons why this strategy can be beneficial:

  • You can give up to $17,000 in 2023 to any number of people without triggering the gift tax or reporting it to the IRS. This amount will increase to $18,000 in 2024.
  • If you are married, you and your spouse can combine your annual exclusions and give up to $34,000 in 2023 or $36,000 in 2024 to each recipient.
  • If you give more than the annual exclusion amount to a single person, you can use your lifetime gift tax exclusion to avoid paying taxes on the excess amount. The lifetime exclusion is $12.92 million per person in 2023.
  • Gifting can reduce the value of your estate and potentially lower your estate tax liability when you die. The estate tax exemption is also $12.92 million per person in 2023.

9. Invest In Municipal Bonds

Municipal bonds are debt securities issued by state or local governments to fund public projects. The interest income from these bonds is generally exempt from federal income tax and may also be exempt from state and local taxes, depending on where you live.

10. Claim the Foreign Tax Credit

If you paid or accrued taxes to a foreign country or U.S. possession on income from sources outside the U.S., you may be able to claim a credit or deduction for those taxes. This can reduce your U.S. tax liability and avoid double taxation.

  • You can claim a credit for the foreign taxes you paid or accrued on income that is also subject to U.S. tax, such as wages, dividends, interest, royalties, or business profits.
  • You can choose to take the foreign tax credit as a nonrefundable credit that reduces your U.S. tax dollar for dollar, or as an itemized deduction that reduces your taxable income. In most cases, the credit is more advantageous than the deduction.
  • You can carry over any unused foreign tax credit to future years, subject to certain limitations and rules. This can help you utilize the credit in years when you have higher U.S. tax liability.

Connect With One of Our Tax Advisors for 2023

While the strategies in this guide can help you manage your tax burden, they’re not the only way to do it. A better place to start is with a strategic plan tailored to your specific needs and goals.

That’s where we come in.

We invite you to talk with one of our professional tax advisors to build a plan that works for you. You’ll get personalized advice for your unique financial situation and goals so you can take advantage of all the 2023 year-end tax saving tips that are available to you.