5 Strategies for Year-End Tax Planning

For many people, hearing the word “tax deadlines” brings mid-April to mind. In reality, there are many end-of-year strategies that can help reduce your tax liability. 

Considering potential deductions at the proper time can be a key part of your annual financial planning process, reducing stress at tax time and even lowering your costs in some situations. 

Why A Tax Strategy Matters

The timing of your income and your deductions can make a significant difference in your liability, so it’s important to talk to a tax professional and create a plan that makes sense for you. Year-end tax planning varies by situation, and it can even vary for you from year to year. 

Don’t default to what worked best last year. Instead, sit down with your tax advisor to discover which options will be most beneficial for your financial goals in the current year and the one ahead.

5 Tips for Year-End Tax Planning

  1. Maximize your retirement contributions. 

If you’re still working and want to reduce your taxable income for this calendar year, make sure you maximize contributions to your retirement plan. Whether you have a 401(k), 403(b), or individual retirement account (IRA), this is often the best place to begin your year-end tax planning. 

According to current IRS retirement contribution tables, the maximum contribution for IRAs is $6,500 annually until age 50, when it increases to $7,500. The maximum contribution for 401(k) and 403(b) accounts is $22,500 until age 50, when it increases to $30,000. 

If you’re eligible to contribute to a 401(k) or traditional IRA, your contributions may be pre-tax, which means you will not owe federal or state tax at the time of your initial contribution. Keep in mind that you will owe taxes when funds are distributed from your retirement plan back to you. 

If you’re contributing to a Roth IRA, any year-end contributions will be after-tax, meaning you won’t receive a tax deduction on the amount you deposit. However, maximizing your Roth IRA contribution could still be a good option for long-term financial freedom, even without the tax deduction today. 

  1. Consider your tax-loss harvesting options.

If you have an investment account, you may be able to minimize your tax liability by selling securities strategically. Simply put, tax-loss harvesting occurs when you sell an investment at a loss, using that loss to offset other realized gains and lowering your tax burden for the current year. 

This tool is helpful when used correctly, but it’s important to discuss any potential sales with a tax advisor to ensure that you are effectively minimizing your tax burden. 

  1. Create a charitable giving strategy. 

Charitable donations are an excellent way to maximize generosity while minimizing tax burden. There are several ways to do this. 

First, if you must take required minimum distributions (RMDs) from an IRA, consider employing a Qualified Charitable Donation (QCD) directly from that account. A QCD transfers funds directly from your IRA to an approved charitable organization. QCDs are excluded from your taxable income but still count toward your annual RMD up to $100,000 per year.

Even if you do not need to take RMDs, charitable donations can provide tax deductions when timed correctly. Check with your qualified charity of choice, along with your financial institution, to learn about their timelines and ensure that your gift is posted in the calendar year you intend. 

If you want to give charitably but don’t have a specific organization in mind, a donor-advised fund (DAF) could provide a solution. When you donate to a DAF, you can take an immediate tax deduction, even if the DAF does not pay the charity before year-end. 

  1. Give tax-wise gifts.

Based on current IRS gift tax exemption tables, you can give up to $17,000 to any one person in 2023 that is not subject to gift tax. While you’ll need to file a gift tax return for anything over that amount, keep in mind the lifetime gift tax exemption amount of $12.92 million, which applies to each individual child. If you’re a parent, you should consult your tax professional if you intend on giving large gifts to your kids as the end of the year approaches.

  1. Consider a Roth IRA conversion. 

Depending on your retirement plan and current life situation, converting a traditional retirement account into a Roth IRA could offer significant advantages in your year-end tax strategy. Roth IRAs allow you to keep funds in your account for longer, as well as receiving tax-free income after you retire. 

Your Roth IRA holdings will become income-tax free assets when they’re passed along to your beneficiaries as well. If you expect your income tax rates to be higher in the future, a Roth IRA may be a good idea. 

A Financial Partner Year After Year

Whether you’re planning your year-end tax strategy or just looking for a trusted financial professional to help you plan for the future, Marietta Wealth is here to help. 

Marietta Wealth is a fee-only financial advisory firm focused on providing comprehensive financial planning and tailored investment strategies to clients, helping them find the financial freedom to pursue their dreams. 

Our financial advisors are experts in investment management, financial planning, and retirement planning, and we love to partner with our clients long-term to help them meet their goals and make sense of their finances. Get in touch with us today.

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This article is not intended to be used, and should not be used, as the sole basis for legal advice.  The reader should seek and rely upon the guidance and advice of legal counsel before making decisions regarding any estate planning tools or documents.