Preparing Your Taxes for Year-End

As the end of the calendar year approaches, here are six action items to consider if you’re looking to maximize tax advantages before December 31^st.

Defer a Bonus

When you’re straddling the line between tax brackets, it can make sense to defer as much income as possible to stay in a lower tax bracket. You might delay freelance billings until late December, or ask your boss to defer an end-of-year bonus until after the new year. Of course, keep in mind that income deferred until next year will still count the next time tax season rolls around—but if you’re already anticipating higher earnings and a higher tax bracket next year, deferring taxable income to stay in a lower tax bracket for now may make the most sense.

Donate to Charity

Registered donations to charity during the calendar year can reduce your taxable income. Contributions can be made in the form of cash, or as a donation of non-cash assets such as stocks and bonds. Deductions are typically limited to 50 percent of your adjusted gross income (AGI), and must be made before the close of the tax year. The IRA publishes more information online about what counts as a qualified charity and how much you’re allowed to deduct from taxable income, along with updated information as tax laws change.

Learn About Tax Loss Harvesting

If you’re a stock market investor, it pays to understand tax loss harvesting. Investors typically pay tax to the federal government on capital gains from any tradable security, such as stocks or bonds. Because capital losses can be used to offset taxable capital gains, selling a poor-performance security before the end of the year could ultimately lower your tax bill. At the same time, be aware that experts are mixed on the ultimate benefit of this strategy, as tax loss harvesting still involves selling at a loss. If you’re unclear or unsure if tax loss harvesting is right for you, consult an expert before making any moves.

Make an IRA Contribution

While you do have until tax day to make a contribution to your Individual Retirement Account (IRA), the approach of December is a good opportunity to get ahead on your to-do list for next year. Money that goes into your IRA can reduce your taxable income, potentially putting you into a lower tax bracket. For 2023, you can contribute up to $6,500 if you’re under 50, or $7,500 if you’re aged 50 and above. If you have other tax-deferred savings accounts, such as a health savings account, consider making a contribution here as well.

Contribute to Your Roth IRA

If you have a Roth IRA, rather than the traditional Individual Retirement Account, you won’t see any short-term tax benefits from making your yearly contribution—but it’s still a good idea to max out your annual contribution limits, so that you can derive more tax benefits in the future when you’re ready to start making tax-free withdrawals from the account. For a refresher on the difference between an IRA and a Roth IRA account, including which tax-deferred option may be the best fit for you and your finances, check out this blog.

Take Required Distributions

The other aspect of retirement accounts to consider when tax season rolls around is when to withdraw funds. People aged 72 and up must withdraw a certain amount from their tax-deferred retirement account every year, by the end of the year. This rule applies to traditional IRAs, as well as 401(k) plans and other employer sponsored retirement plans. Failing to take the required minimum distribution (RMD) so will trigger a significant penalty, which is currently 50 percent of the RMD not taken. The IRS has more information online about when distributions must be taken and how much.