Disclaimer! Patton Wealth is NOT a tax advisor, does not provide tax advice, and the following is NOT meant to be advice but for information purposes only. For any tax questions or issues, we encourage you to contact a tax advisor.

As the year draws to a close, many people begin looking for ways to maximize their tax savings. A little planning and careful review now can help ensure you don’t leave any potential deductions or credits on the table. Here’s a comprehensive year-end checklist to help you optimize your tax savings.

1. Max Out Retirement Contributions

One of the best ways to lower your taxable income is by contributing to a retirement account, such as a 401(k), 403(b), or IRA.

401(k) or 403(b): The contribution limit for employer-sponsored retirement accounts for 2023 is $22,500, with an additional $7,500 catch-up contribution allowed if you are 50 or older. Contributions to these accounts reduce your taxable income, so try to contribute the maximum allowable amount.

IRA Contributions: If you qualify, you can contribute up to $6,500 to a traditional IRA in 2023 (or $7,500 if you're 50 or older). Traditional IRA contributions are tax-deductible if you meet certain income requirements.

Roth IRA: Though contributions are not tax-deductible, the withdrawals during retirement are tax-free. If you're eligible based on income limits, contributing to a Roth IRA can be beneficial for tax-free growth.

2. Take Advantage of Health Savings Accounts (HSAs)

Health Savings Accounts offer significant tax advantages if you have a high-deductible health plan (HDHP). You can contribute up to $3,850 if you're single or $7,750 for family coverage, with an additional $1,000 catch-up contribution allowed if you're 55 or older. HSA contributions are tax-deductible, earnings grow tax-free, and withdrawals for qualified medical expenses are also tax-free. Unlike Flexible Spending Accounts (FSAs), funds in an HSA roll over year-to-year, making it a great way to save for future medical costs.

3. Harvest Capital Losses

If you’ve experienced losses on certain investments, you can use those losses to offset capital gains or even up to $3,000 of ordinary income per year. This strategy, known as tax-loss harvesting, can help reduce your taxable income. When reviewing your portfolio:

Sell Losses: Identify underperforming stocks or assets and consider selling to lock in the loss. Just remember the wash-sale rule: if you buy the same or a “substantially identical” security within 30 days, you won’t be able to deduct the loss.

Offset Capital Gains: If you've had a profitable year with some investments, offset those gains by selling assets that are currently at a loss, helping to keep your net gains and resulting tax burden lower.

4. Make Charitable Contributions

Giving to charity is a great way to reduce your taxable income while supporting causes that matter to you.

Cash Donations: Donations made by cash, check, or credit card to qualified organizations are generally tax-deductible.

Non-Cash Donations: Donating items like clothing, household goods, or even stocks to charity may also be deductible. Keep an itemized list and ensure you get a receipt.

Qualified Charitable Distributions (QCDs): If you're 70½ or older, you can donate up to $100,000 directly from your IRA to a qualified charity without the amount being included in your taxable income. This is especially beneficial if you’re required to take a Required Minimum Distribution (RMD), as it can help satisfy that requirement without adding to your tax burden.

 

5. Review and Utilize Flexible Spending Accounts (FSAs)

If you have a health or dependent care Flexible Spending Account, make sure to use up the funds before the end of the year. Unlike HSAs, FSA funds generally do not roll over into the next year, so it’s a “use it or lose it” situation.

Check for Grace Periods: Some employers offer a grace period or allow you to carry over a limited amount into the next year, so be sure to review your plan’s specific rules.

Spend on Eligible Expenses: This includes medical expenses, prescription drugs, and childcare expenses (if you have a dependent care FSA). Now’s the time to stock up on essentials or schedule last-minute appointments if needed.

6. Plan for Required Minimum Distributions (RMDs)

If you're over 73, you must take Required Minimum Distributions (RMDs) from traditional retirement accounts. Failing to take the RMD can result in a hefty penalty—up to 50% of the required amount.

Coordinate Withdrawals: Ensure you've taken all necessary distributions from your traditional IRA or 401(k) by December 31. If you turned 73 this year, you have until April 1 of the following year to take your first RMD, but subsequent RMDs must be taken by December 31 each year.

Consider Timing: Sometimes, withdrawing RMDs earlier in the year can avoid a potential rush or last-minute error at the end of the year.

7. Defer Income or Accelerate Deductions

Depending on your tax bracket and financial situation, you may want to defer income to next year or accelerate deductible expenses into this year.

Defer Income: If you expect your income to be lower next year, consider delaying end-of-year bonuses or self-employment income to 2024. This can help you stay within a lower tax bracket.

Accelerate Deductions: Pay for deductible expenses this year if you’re close to exceeding the standard deduction amount. This could include medical expenses, mortgage interest, and property taxes, which may help maximize itemized deductions.

8. Check Eligibility for Education Credits

If you or a dependent attended college or another qualifying educational institution in 2023, make sure you’re taking advantage of tax credits like:

The American Opportunity Tax Credit (AOTC): This provides up to $2,500 per eligible student for the first four years of higher education.

The Lifetime Learning Credit (LLC): This offers a credit of up to $2,000 per tax return and can apply to both undergraduate and graduate courses.

To qualify, you need to have paid tuition and certain other related expenses for yourself, your spouse, or a dependent.

9. Reassess Your Withholding

If you received a significant tax refund last year, or if you owed a lot, now is a good time to check your withholding. By adjusting your W-4, you can fine-tune the amount of tax withheld from your paycheck.

Avoid Underpayment Penalties: If you’ve had substantial income without sufficient withholding (from sources like investment income or self-employment), making an estimated tax payment before the year-end can help avoid penalties.

Ensure Withholding Matches Income Changes: Changes in income, marital status, or dependents should trigger a reassessment to avoid surprises when you file your taxes.

10. Check Eligibility for Green Energy Tax Credits

If you've made energy-efficient upgrades to your home, you may be eligible for certain federal tax credits.

Residential Energy Efficient Property Credit: This credit applies to expenses for solar panels, wind turbines, geothermal heat pumps, and certain other green energy improvements.

Energy Efficient Home Improvement Credit: Smaller upgrades like new windows, doors, or insulation may qualify for a credit.

Final Thoughts

Year-end tax planning may seem overwhelming, but taking the time to optimize your tax situation can yield substantial savings. From maximizing retirement contributions to leveraging tax credits, these steps can help you make the most of tax-advantaged opportunities. Consider consulting a tax professional if you have complex financial situations or want to create a tailored plan for your unique circumstances.

The information provided here is for general informational purposes only and should not be considered an individualized recommendation or personalized investment advice. Any specific securities or investment strategies mentioned here may not be suitable for everyone. Each investor needs to review an investment strategy for his or her own situation before making any investment decision including whether to retain an investment adviser.

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