As we approach the end of the year, the prospect of a new financial chapter beckons, and the timing couldn't be better for some strategic tax planning. It's a vital yet often overlooked opportunity to ensure you're not leaving money on the table.
In this blog post, we'll explore some end-of-year tax planning tips that you should consider to optimize your tax situation and safeguard your financial well-being.
1. Capitalize on Lower Tax Brackets
When it comes to effective end-of-year tax planning, one essential aspect is understanding your current tax bracket. If, as the year comes to a close, you find yourself in a lower tax bracket than you anticipate for the future, it's a prime opportunity to consider Roth conversions.
If you anticipate an increase in the following years, initiating a Roth conversion in the year of lower income can be a game-changer. It allows you to capitalize on the lower income tax rate that year and then let that money grow tax-free in your Roth IRA account.
Roth conversions allow you to shift taxable income from a higher bracket to a lower one. By taking advantage of your lower tax bracket, you not only reduce your tax bill for the current year but also set the stage for a more tax-efficient financial future.
2. Bunching and Itemizing Deductions
Utilize the deduction bunching strategy by consolidating charitable contributions into a single year, potentially doubling deductions and reducing taxable income. For instance, if you plan to make charitable donations in both December 2023 and January 2024, consider combining these contributions into December 2023.
Pair this with itemizing deductions in one year and utilizing the standard deduction the next, allowing for substantial reductions in taxable income across multiple years. If you are close to or over the threshold, now is a good time to prepay deductible expenses, such as mortgage payments, state taxes, unreimbursed medical bills, and allowable educational expenses like tuition.
These strategies offer flexibility, optimizing your tax situation by leveraging both itemized and standard deductions, ultimately lowering your long-term tax burden.
3. Claiming Capital Gains
While many taxpayers are primarily concerned with minimizing capital losses, there's a lesser-known strategy that involves optimizing your capital gains. If your income falls within the range of approximately $110,000, you may qualify for a 0% federal tax rate on your reported capital gains. This unique opportunity can be incredibly advantageous. Rather than waiting for a future year when you might face a 15% tax on capital gains, consider selling stocks with gains now.
By leveraging this end-of-year tax planning tip, you effectively pay zero tax on these gains, maximizing your financial benefits. The absence of a wash sale rule for claiming gains allows you to immediately reinvest your funds or diversify your portfolio, taking full advantage of this tax-saving opportunity. Claiming capital gains strategically is a lesser-known but highly effective way to optimize your tax position and reduce your overall tax liability.
4. Identifying State-Only Deductions
Making contributions to a 529 plan before year-end won't impact your federal tax liability, but it can lead to potential state tax savings. Over 30 states provide the option to deduct a portion of your 529 plan contributions from your state income taxes. Typically, to qualify for this deduction, you'll need to contribute to your state's specific plan. However, some states permit deductions for contributions made to any state's plan. Be sure to review the rules specific to your state. Additionally, it's important to note that in many states, not only parents but also grandparents and other family members can contribute to your child's 529 plan. In some cases, these contributors may also be eligible for tax deductions on their contributions.
In some states, contributing to an ABLE account may lower tax liability for individuals with qualifying disabilities. You can typically contribute up to $16,000 each year to a loved one’s ABLE account without risking the loss of government benefits (ABLE account beneficiaries may have higher contribution limits). You are not restricted to investing in your own state's plan, but some states do offer tax deductions for ABLE account contributions, especially for their residents.
Effective end-of-year tax planning tips are a vital aspect of maintaining your financial health and minimizing your tax liability.
By thoughtfully assessing your tax situation, capitalizing on lower tax brackets, leveraging deduction bunching, optimizing itemized deductions, and considering capital gains strategies, you can significantly enhance your tax position. Remember to maximize your retirement and HSA contributions, securing your financial future with a well-thought-out year-end tax strategy. With these approaches, you can potentially enjoy a lower tax bill and greater financial security in the coming years.
Confidently Implement Your End-of-Year Tax Planning Strategy with Bestgate Wealth Advisors
Our team, composed of experienced CPAs and CFP® practitioners, is here to help you make more informed decisions about your investments and their tax implications. Contact us today to get assistance with your end-of-year tax planning.