As the year comes to a close, it’s the perfect time to revisit your tax planning strategy. Working with your wealth advisor to reduce your 2023 tax liabilities and make the most of year-end opportunities can pay off. Here are 10 essential steps to take before December 31st to ensure you’re in a strong position for tax season.

1. Maximize Retirement Plan Contributions

Take advantage of the full contribution limits for your 401(k) or 403(b). In 2023, you can contribute up to $22,500. If you’re 50 or older, catch-up contributions allow an additional $7,500, bringing your total contribution to $30,000. Keep in mind that employer matching contributions don’t count towards these limits, and combined employee and employer contributions can’t exceed $66,000 ($73,500 with catch-up contributions).

2. Contribute to Your Health Savings Account (HSA)

If you’re enrolled in an HSA-eligible health plan, you can contribute up to $3,850 for individual coverage or $7,750 for family coverage in 2023. For those 55 and older, there’s an additional $1,000 catch-up contribution. HSAs offer tax-deductible contributions, tax-free growth, and withdrawals for qualified medical expenses are also tax-free, making them an effective tool for reducing taxable income.

3. Bunch Charitable Contributions

If you’re nearing the standard deduction limit ($13,850 for individuals, $27,700 for married couples), consider bunching your charitable donations. This strategy involves making larger contributions every other year to exceed the standard deduction, which could increase your tax deductions. For instance, if you typically donate $10,000 annually, you could donate $30,000 in a lump sum every third year, boosting your deduction for that year.

4. Set Up a Donor-Advised Fund (DAF)

If you itemize deductions, donating to a Donor-Advised Fund (DAF) can be a smart move. With a DAF, your donations grow tax-free, and you receive a tax deduction in the year of the contribution. You can contribute assets like cash, stock, or real estate, and then direct those funds to your chosen charities when it suits you. It’s a great way to bunch charitable donations over multiple years.

5. Make Qualified Charitable Distributions (QCDs)

If you’re 70½ or older, you can transfer up to $100,000 from your IRA to qualified charities, tax-free. These Qualified Charitable Distributions (QCDs) count toward your required minimum distribution (RMD) and are excluded from taxable income. However, QCDs cannot be directed to a donor-advised fund or private foundation.

6. Harvest Tax Losses

If you have investments that have lost value, consider selling them to offset gains in your portfolio. You can deduct up to $3,000 of excess losses against other income. However, be aware of the wash-sale rule: if you buy the same or a substantially identical security within 30 days of selling at a loss, the deduction is disallowed.

7. Defer or Accelerate Income

High earners may want to consider deferring income to next year if they expect a drop in income, which would lower their tax rate. Conversely, accelerating income into the current year might be a good strategy if you anticipate higher earnings in 2024. Your wealth advisor can help determine which strategy suits your financial situation best.

8. Adjust Your Tax Withholding

If it looks like you might owe taxes at the end of the year, consider adjusting your withholding now. You can increase withholding on your paycheck or instruct the administrator of an inherited IRA to withhold taxes from your RMD (Required Minimum Distribution) to offset some of that income.

9. Take Required Minimum Distributions (RMDs) from IRAs

If you are required to take RMDs from your retirement accounts, make sure you withdraw the necessary amount by December 31st to avoid penalties. Failure to do so results in a 25% penalty on the amount you missed. If you do miss the deadline, you can pay the shortfall within two years and potentially reduce the penalty to 10%.

10. Maximize Your Annual Gifts

In 2023, the annual gift tax exclusion is $17,000 per individual, or $34,000 for married couples. Gifts beyond these limits count toward your lifetime exemption ($12.92 million for individuals, $25.84 million for married couples). If you plan to contribute to a 529 plan, you can superfund the account by giving up to $85,000 in 2023, spreading the gift over five years for tax purposes.

Conclusion

As the year ends, taking proactive steps to reduce your tax liability and maximize deductions can significantly improve your financial position. Whether it’s contributing to retirement accounts, optimizing charitable giving, or harvesting tax losses, now is the time to plan. Be sure to work with your wealth advisor to tailor these strategies to your unique situation and ensure you’re on track for a strong financial year.