Year-End Tax Planning Strategies for Individuals
General Tax Planning Strategies
General tax planning strategies for individuals include accelerating or deferring income and deductions, as well as careful consideration of timing-related tax planning strategies concerning income, investments, and retirement planning. For example, taxpayers might consider using one or more of the following strategies:
Investments. Selling any investments on which you have a gain (or loss) this year. For more specifics on this, please reach out to the office.
Year-end bonus. If you anticipate an increase in taxable income this year, in 2023, and are expecting a bonus at year-end, try to get it before December 31. Contractual bonuses are different, in that they are typically not paid out until the first quarter of the following year. Therefore, any taxes owed on a contractual bonus would not be due until you file your 2024 tax return in 2025.
Stock options. If your company grants stock options, then you may want to exercise the option or sell stock acquired by exercising an option this year. Use this strategy if you think your tax bracket will be higher in 2023. Generally, exercising this option is a taxable event; the sale of the stock is almost always a taxable event.
Withholding. If you know you have a set amount of income coming in this year that is not covered by withholding taxes, there is still time to increase your withholding before year-end and avoid or reduce any estimated tax penalty that might otherwise be due.
Accelerating or Deferring Income and Deductions
Strategies that are commonly used to help taxpayers minimize their tax liability include accelerating or deferring income and deductions. Which strategy you use depends on your current tax situation.
Most taxpayers anticipate increased earnings from year to year, whether it’s from a job or investments, so this strategy works well. On the flip side, however, if you anticipate a lower income next year or know you will have significant medical bills, you might want to consider deferring income and expenses to the following year.
In cases where tax benefits are phased out over a certain adjusted gross income (AGI) amount, a strategy of accelerating income and deductions might allow you to claim larger deductions, credits, and other tax breaks for 2023, depending on your situation. Roth IRA contributions, child tax credits, higher education tax credits, and deductions for student loan interest are examples of these types of tax benefits.
Other Year-End Moves
Roth Conversions. Converting to a Roth IRA from a traditional IRA would make sense if you’ve experienced a loss of income (lowering your tax bracket) or your retirement accounts have decreased in value. Please call if you would like more information about Roth conversions.
Maximize Retirement Plan Contributions. If you own an incorporated or unincorporated business, consider setting up a retirement plan if you don’t already have one. It doesn’t need to be funded until you pay your taxes, but allowable contributions will be deductible on this year’s return.
If you are an employee and your employer has a 401(k), contribute the maximum amount ($22,500 for 2023), plus an additional catch-up contribution of $6,500 if age 50 or over, assuming the plan allows this, and income restrictions don’t apply.
If you are employed or self-employed with no retirement plan, you can make a deductible contribution of up to $6,500 a year to a traditional IRA (deduction is sometimes allowed even if you have a plan). Further, there is also an additional catch-up contribution of $1,000 if age 50 or over.
Health Savings Accounts. Consider setting up a health savings account (HSA). You can deduct contributions to the account, investment earnings are tax-deferred until withdrawn, and any amounts you withdraw are tax-free when used to pay medical bills.
To be eligible, you must have a high-deductible health plan (HDHP), and only such insurance, subject to numerous exceptions, and you must not be enrolled in Medicare. For 2023, to qualify for the HSA, your minimum deductible in your HDHP must be at least $1,500 for self-only coverage or $3,000 for family coverage.
Don’t Miss Out.
Implementing these strategies before the end of the year could save you money. If you are ready to save money on your tax bill, please contact the office today.
Jeffrey Schweitzer can be found at Northeast Financial Strategies Inc (NFS) at Wampum Corner in Wrentham. NFS works with individuals and small businesses providing financial and estate planning, insurance, investments and also offers full service accounting, bookkeeping, payroll, income tax preparation, and notary public services. For more information, stop by the office, call Jeffrey at 800-560-4NFS or visit online - www.nfsnet.com
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