Editor’s Note: This story originally appeared on NewRetirement.
Yes. The year is already coming to a close. Use this list of year-end tax planning tips to help launch you into a better future.
It has been another interesting 12 months, with stock market gains, ongoing inflation concerns, looming threats of recession, and some continued uncertainty.
No matter what the future holds, the following are key end-of-year tax strategies to help you keep more of your own money.
1. Strategize Roth Conversions Before the End of This Year
A Roth conversion is when you take money from a traditional retirement savings account and convert it to a Roth account.
Use this 2023 Roth Conversion Calculator to understand the tax implications of doing a Roth conversion.
Compare estimated taxes when you do nothing, convert up to a specific threshold, or convert a custom amount.
2. Make Moves Now That Benefit You in the Future
You’ll want to prep your taxes carefully this year. However, you should also plan for the future! Why? There are actually two key reasons:
- Inaccurate future tax planning can result in a rather large error in your projections for retirement security.
- Forethought can help you retain much more of your hard-earned money
Example: Strategize Future Roth Conversions
By transferring some of the money from your traditional IRA into a Roth IRA, you not only turn the money you moved into nontaxable income in retirement, but it also helps to reduce your RMDs by lowering the balances in your traditional IRAs.
However, there’s one big catch: When you do a Roth conversion, you have to pay taxes that year on the money you moved to the Roth account. If you have a huge balance to convert, you may not be able to afford to do it all in a single year.
On the other hand, splitting the conversion out over five or 10 years would reduce your annual and total tax bill for the converted money.
Learn more about Roth conversions and consider how possible future tax increases should impact your conversion strategy. (HINT: You want to convert when you are paying less in taxes.)
3. Reduce Taxable Income
The most basic and powerful way to cut your taxes is to cut your taxable income.
You can do this in a number of ways: Find sources of nontaxable income, use deductions to remove income from your taxable total, and grab any tax credits you qualify for.
Here are a few specific examples.
Try Tax Loss Harvesting
If you sell investments that aren’t tucked away in a tax-advantaged or tax-deferred retirement account, you’ll have to pay capital gains taxes on the profits you made from those investments.
However, if you sold any investments at a loss in your taxable accounts during the same year, you can wipe out those gains for tax purposes and avoid paying the related taxes.
This approach is known as tax-loss harvesting, and it could be especially useful if you sold any assets during any of the stock market dips.
Consider Bundling Medical and Charitable Deductions Into Certain Years
Because the threshold for deductions on medical expenses and charitable donations is higher, you may want to consider bundling those expenses into certain years and only claiming them every two or three years.
Here are a few examples.
Max Out Medical Expenses
By grouping as many non-emergency medical expenses as possible in a single year, you can maximize the deduction you get for those expenses. You can only deduct expenses that exceed 7.5% of your adjusted gross income.
If you’ve already had some significant health care expenses for the year, see if you can move medical expenses that you’d normally take next year to the end of this one.
For example, if you have a dentist appointment in January, move it to mid-December instead.
Long-Term Care Insurance
If you recently purchased long-term care insurance, you may be able to deduct the premiums. The older you are, the more you can deduct. The deductions range from:
- $480 for someone 40 years or less
- $890 for people older than 40 and younger than 50
- $1,790 for those 50-60
- $4,770 for those between 60 and 70
- $5,960 for someone over 70
Instead of making annual charitable gifts, give two, three, or even five years’ worth of donations in a single year, then take a few years off.
Focusing all of your donations in a single year increases the value of deductions beyond the threshold for a single year, and then you can take the larger standard deduction in the “skip” years.
A donor-advised fund may be an option if you are bundling charitable expenses.
Donor-Advised Fund (DAF) definition: A donor-advised fund is a private fund administered by a third party and created for the purpose of managing charitable donations on behalf of an organization, family, or individual.
According to Fidelity, “A DAF may allow for tax-deductible contributions of cash or appreciated assets in a given year, but then control the timing of the distributions to charity in future years.”
Still Working? Max Out Your Tax-Advantaged Savings!
The contribution limits are:
- $22,500 for elective-deferral contributions to 401(k)s, 403(b)s, 457s and Thrift Savings Plans. And, if you are 50 or older, the catch-up contribution is an additional $7,500. So, you can save a total of $30,000!
- $6,500 for traditional and Roth IRAs. And the catch-up contribution for people 50 or older is $1,000. So, you can save up to $7,500 with tax advantages.
And, remember that you can max out both kinds of savings vehicles.
If You Are Working, Defer Income
Depending on your future work prospects, you may want to push some of your income — like a bonus — out till next year.
4. Beware of the AMT
The Alternative Minimum Tax (AMT) is figured separately from your regular tax liability. There are different rules and you have to pay whichever tax amount is higher.
It was designed to make sure that wealthy people were not getting too big of a break with deductions, but it can also impact the middle class.
Accelerating tax deductions can trigger the AMT.
5. Over 72? Don’t Forget Your RMDs
Last year, the rules for when you need to take Required Minimum Distributions (RMDs) changed.
RMDs are minimum amounts that IRA and retirement plan account owners generally must withdraw annually starting with the year they reach age 72 (73 if you reached age 72 after Dec. 31, 2022, or reach 75 after 2033).
A 2015 report by the Treasury’s Inspector General estimated that more than 250,000 individuals failed to take RMDs in an earlier year. That is a costly mistake.
The penalty for missing your RMD is a whopping 50% of what you should have taken out.
6. In a Low Tax Bracket? Pick Up Capital Gains
Tax loss harvesting is good if you have sold stocks that have lost money. However, if you somehow eked out gains, now could be a good time to sell stocks that have appreciated significantly in value.
This can be a particularly good strategy if you are in the 10% and 12% tax brackets since your capital gains tax may be zero.
If you sell, you can then repurchase your positions, which resets the basis and minimizes the amount of tax to be paid on future gains.
Even if you’re not in one of the lowest tax brackets, you may still want to sell winning stocks to reset the basis if you’re also harvesting losses.
7. Pay Attention to the Medicare Surtax and Net Investment Income Tax for High Earners
There are two types of Medicare tax that could be affected by your income level.
The Additional Medicare Tax
This tax is on any income (wages, compensation, or self-employment income) that exceeds the threshold amount for your filing status.
According to the IRS, “The 0.9% Additional Medicare Tax applies to individuals’ wages, compensation and self-employment income over certain thresholds, but it does not apply to income items included in Net Investment Income.”
The income thresholds for the Additional Medicare (and NIIT) Tax are:
- $200,000 for single filers
- $250,000 for married couples
However, the additional 0.9% tax only applies to the income above the threshold limit. (So, if you earn $250,000, the first $200,000 is subject to the regular Medicare tax of 1.45% but you will pay an additional 0.9% on $50,000.)
Employers are responsible for withholding the Additional Medicare Tax from wages it pays in excess of $200,000 in a calendar year, without regard to your filing status or wages paid by another employer.
The Net Investment Income Tax (NIIT)
The Net Investment Tax, on the other hand, is a 3.8% tax on investments if your income exceeds the same thresholds as the Additional Medicare Tax (given above). These are the types of investments subject to the tax:
- Interest, dividends, and other gains on stocks, bonds, and mutual funds.
- Capital gain distributions from mutual funds.
- Gains from real estate in the form of rent or sales
According to the IRS, “If you are an individual who is exempt from Medicare taxes, you still may be subject to the Net Investment Income Tax if you have Net Investment Income and also have modified adjusted gross income over the applicable thresholds.”
This is particularly relevant for people who have RMDs on tax-advantaged retirement accounts.
8. 65 or Older? Know That You Have a Higher Standard Deduction
If you take the standard deduction instead of itemizing, your standard deduction is higher if you are over 65. For the 2023 tax year, the standard deductions are:
- Younger than 65: $13,850
- 65 or older: $13,850 + $1,850
Head of Household:
- Younger than 65: $20,800
- 65 or Older: $20,800 + $1,850
Married Filing Separately:
- Younger than 65: $13,850
- 65 or Older: $13,850 + $1,500 per qualifying individual
Married Filing Jointly:
- Younger than 65: $27,700
- 65 or Older: $27,700 + $1,500 per qualifying individual
The deductions are higher for those who are blind.
9. Know How Your Social Security Benefits Are Taxed
Social Security benefits are taxed only if your income exceeds a certain threshold.
- Federal Taxes: Income for federal taxes is defined as up to 85% of your Social Security benefits (depending on your income), plus all other taxable income and some nontaxable income including municipal bond interest.
- State Taxes: You also need to know your state’s rules on taxing Social Security benefits if you live in one of the 13 states that do.
10. Thinking of Relocating? Consider the Best States To Retire In for Taxes!
Most of the wisdom shared above is most relevant to federal taxes. However, state taxes can take a big bite out of your retirement nest egg as well.
If you are considering relocating for retirement, you might as well look at states that have the most favorable tax rates for retirees.
11. 529 Plans
Accounts called 529 plans provide federal tax-free growth and tax-free withdrawals for education expenses. Additionally, there may be state tax credits or deductions for your contributions to these plans.
However, consider carefully about when to tap this resource. Allowing the money to grow in the tax-deferred account produces greater tax savings rather than withdrawing it now.
12. Consider Getting Professional Help
When you’ve got a lot of financial balls in the air, your tax return can get remarkably complicated. This is especially true if it’s the first year you’re taking a required minimum distribution.
In that case, strongly consider getting a tax pro (a CPA or enrolled agent, not an uncertified tax preparer) to do your return for you.