As the new year approaches, so does my favorite time of the year: tax season.
Mind you, it’s not because I enjoy paying taxes, but because I enjoy trying to save other people money on their taxes through the IRS Volunteer Income Tax Assistance (VITA) program.
The best time to lower your own taxes, however, is before the year ends — as in right now.
With a little planning and some research, making the following tax moves before Dec. 31 might help you to owe less taxes or receive a bigger refund on your 2023 tax return, the one that’s due by April 2024.
1. Put money in traditional retirement accounts
Unlike contributions to Roth retirement accounts, those to traditional retirement accounts are tax-deductible upfront. So if you put money in a traditional account in 2023, it stands to lower your taxable income for 2023.
For most types of employer-sponsored retirement accounts, the IRS allows a contribution of up to $22,500 for 2023. If you’re 50 or older, that amount increases to $30,000. These amounts do not include any contributions made by your employer on your behalf either.
Although saving upwards of $20,000 or more in one year might seem daunting, every little bit counts. For example, a $5,000 contribution to a traditional 401(k) account could potentially save you $1,100 on your taxes if your tax rate is 22%.
Typically, the deadline for contributions into employer-sponsored retirement accounts is Dec. 31. For traditional individual retirement accounts, though, you have until Tax Day 2024 to make contributions for 2023.
2. Ditch underperforming stocks
If you own stocks that are in a taxable account, such as a brokerage account, take inventory of their performance. If it turns out that any of your stocks are underperforming, consider whether it would benefit your 2023 taxes, or your broader financial goals, to sell any of the losing stocks before year-end.
When your capital losses (which include stock losses) in a given year exceed your capital gains for that year, the IRS allows you to deduct a certain amount of the excess loss on your taxes. Usually, this amount is up to $3,000 (or $1,500 in the case of a married person who files a separate tax return).
3. Donate to charity
Standard deduction or itemized deductions: How do you file? Taxpayers typically get to choose between claiming the standard deduction, which is a flat amount, and itemizing their eligible deductions.
However, because the Tax Cuts and Jobs Act of 2017 roughly doubled the standard deduction amount, more taxpayers are better off claiming it. In fact, around 88% of taxpayers now take the standard deduction, which for 2023 typically ranges from $13,850 to $27,700. It’s even higher for taxpayers who are 65 and older or blind.
Unfortunately for that 88% of taxpayers, charitable contributions are an itemized deduction. If you happen itemize, though, you can donate as much as 60% of your adjusted gross income (AGI) to one or more qualified charitable organizations and write it off on your taxes. These contributions could be cash, household goods or both. But remember, the IRS requires that you have a detailed receipt for donations of $250 or more.
4. Pay deductible 2024 expenses now
Can you pay any of next year’s expenses early? If they would qualify you for a tax deduction or credit and you pay them now, you could claim the deduction or credit on your 2023 tax return.
For example, if you have any children in college, you may be able to prepay their 2024 tuition before 2023 ends. The American Opportunity Tax Credit can be used to provide a tax credit against the first four years of undergraduate tuition. This can be worth up to $2,500 per tax year for each qualifying student.
Do you pay for child care? You may be able to prepay day care costs and claim them this tax year. In 2022, the child and dependent care credit was worth up to $6,000 for two children. If your child or children are under the age of 13 and need supervision while you are working, the costs might be eligible for this credit.
5. Pay itemized 2024 expenses now
If you itemize your deductions rather than claim the standard deduction, there are even more 2024 expenses that you could pay now in order to benefit your 2023 tax return.
Your itemized deductions can include state and local taxes (SALT), such as state income taxes and local real estate taxes. Keep in mind, this deduction is restricted to a total amount of $10,000 per year.
Other qualified itemized deductions can include medical expenses, such as prescription drug costs and insurance copays. The IRS does not allow you to claim these deductions until the amount exceeds 7.5% of your adjusted gross income (AGI). So now is a good time to review your medical costs to determine if your total expenses are higher than this amount.
Here’s a quick example of how this might work to your advantage: Say you paid out $9,500 in medical expenses so far this year, and your dentist recommends that you get dental work that costs $1,500 as soon as you’re able. If your AGI will be $60,000 this year, then $4,500 is 7.5% of your AGI. That means you can deduct $5,000 in medical expenses on your taxes — or $6,500 if you can get to the dentist before Dec. 31.
However, if your medical expenses only totaled $2,500 so far this year, you would not be able to deduct them because the total amount does not exceed 7.5% of your AGI, which is $60,000 in this example.
6. Take your RMD
Once you’ve reached a certain age, which is now 73, the federal government requires you to make annual minimum withdrawals from your traditional employer-sponsored retirement accounts and traditional IRAs. These withdrawals are known as required minimum distributions (RMDs) and generally are considered taxable income.
The amount of an RMD is based on your life expectancy and account balance. There are instructions for calculating the amount on the IRS website; however, most retirement plan managers can assist in this process.
If you do not take an RMD in full and on time, you will face a hefty penalty equal to 25% of the required amount that you did not withdraw. If you correct the mistake in a timely manner, though, the penalty may be reduced to 10%.
For people who turned 74 or older this year, the deadline for taking their 2023 RMD is Dec. 31. People who turned 73 this year get a little longer, until April 1, 2024.
7. Donate your RMD
Consider donating your RMD if you do not need those funds or wish to gift the amount to a charitable organization. By donating your RMD, you not only avoid the penalty for not withdrawing the funds on time but also reduce your taxable income.
This type of donation is called a qualified charitable distribution (QCD), which is made directly from your retirement account straight to the qualified charity, electronically or by check. The IRS will allow you to exclude up to $100,000 in QCDs from your taxable income each year, or up to $200,000 for a married couple.
8. Contribute to a health savings account
Do you have a high-deductible health plan? Generally, this type of insurance plan allows you to deposit money into a health savings account (HSA) and deduct the contribution on your taxes (even if you don’t itemize your deductions).
HSA funds can be used to pay for many medical and dental expenses. With an HSA, you save money by not paying taxes on the money you deposit, and it is not taxed when you take out the funds if you spend them on qualified expenses and otherwise follow IRS rules for HSAs. You’ll receive an added benefit: The money grows tax-free in the account if you don’t use it right away because the funds can stay in your HSA year after year.
Technically, you have up until Tax Day 2024 to make a 2023 contribution to your HSA, but why wait to take advantage of such a valuable tax break?
9. Contribute to a 529 plan
If you are putting away funds for a child’s education by contributing to a 529 college savings plan, you may be able to take a deduction on your state income tax return. Although the IRS does not allow a deduction on your federal return for this type of contribution, it may help to lower your state income tax bill. In many states, Dec. 31 is the last day to contribute to a 529 plan, but some states have different deadlines. So check your state’s tax guidelines on these contributions.