As the year draws to a close, it’s the perfect time to take stock of your finances and implement some strategic moves to minimize your tax liability and optimize your investment portfolio. By planning ahead, you can set yourself up for a more financially secure future. Here are 14 year-end tax and investment strategies to consider:

1. Maximize Retirement Contributions:

Contributing to retirement accounts, such as a 401(k) or IRA, can lower your taxable income and increase your long-term savings. Take advantage of catch-up contributions if you’re over 50 to maximize your retirement nest egg. The maximum 401k contribution for 2023 is $22,500 or $30,000 if you are age 50 or older.

2. Harvest Tax Losses:

Review your investment portfolio for underperforming assets and consider selling them to offset gains from other investments. Tax loss harvesting is the act of intentionally selling an investment at a loss to offset current and/or future capital gains. If executed properly, it is a powerful technique used to significantly lower one’s taxable income and hence taxes.

3. Gift Cash to Lower your Taxable Estate:

You can give up to $17,000 ($34,000 if you are married) in 2023 to anyone without having to file a gift tax return. The gift lowers your taxable estate and is not taxable to the recipient: a win-win scenario. 

4. Charitable Giving:

Make charitable donations before the year-end. Not only does this help your community, but it can also provide a deduction on your income tax return. Be sure to keep receipts and documentation for your contributions.

5. Qualified Charitable Distribution:

A Qualified Charitable Distribution (QCD) enables taxpayers age 70.5 or older to donate up to $100,000 of their IRA directly to charitable organizations in lieu of taking Required Minimum Distributions (RMDs). If you are taking RMDs and also donate to charitable organizations, you should consider a QCD to lower your taxable income. 

6. Roth IRA Conversions:

A Roth IRA conversion allows you to transfer money from your tax-deferred traditional IRA to a tax-free Roth IRA. The conversion is taxable because you have to report the market value of the conversion as income. But with the stock market lower towards the end of the year, a Roth IRA conversion may be beneficial.

7. Donate Appreciated Stock:

Donating appreciated stock gives you a double benefit. You are allowed a tax deduction for the market value of the stock and you also avoid paying capital gains on the appreciated value of the stock. 

8. Pay Medical or College Bills:

You can further lower the value of your estate by paying someone’s medical and/or college bills. Tuition and medical payments are exempt from gift taxes. Hence, you can gift someone $17,000 a year plus pay their medical bills and tuition without having to file a gift tax return while also lowering the total value of your estate. To qualify, the payment must be made directly to the medical provider and/or educational institution.  

9. Defer Bonuses and Income:

If possible, postpone any year-end bonuses or income until the following year to reduce your taxable income for the current year. This strategy can be especially beneficial if you expect your tax rate to be lower next year.

10. Maximize your Health Savings Account (HSA):

If you have a high-deductible health insurance plan, contribute to your Health Savings Account. HSA contributions are tax-deductible, and the funds can be used tax-free for qualified medical expenses.

11. Spend your Flexible Spending Account (FSA):

Unlike the HSA which allows you to carryover unused amounts to future years, FSA carryover limits are much lower. Therefore, if you do not use up your FSA, you will lose those funds. For 2023, the maximum FSA carryover is $610.

12. Consider a Donor Advised Fund (DAF):

Consider contributing to a DAF if you have highly appreciated securities, are considering making large charitable contributions in current and future years, and expect to be in a high income tax bracket in the current year. A DAF is an investment account that you fund with either cash or securities and get a tax deduction in the year of your contribution.

13. Review Estate Planning:

Estate planning is essential for preserving your wealth for future generations. Review your estate plan, update your will, and consider gifting strategies to minimize estate taxes.

14. Evaluate Risk Tolerance:

As you approach the year-end, reassess your risk tolerance and investment goals. Make any necessary adjustments to your portfolio to align with your financial objectives and risk tolerance.

In conclusion, the end of the year is an opportune time to take proactive steps to manage your taxes and investments wisely. By leveraging these strategies, you can optimize your financial position, reduce your tax liability, and work toward a more secure financial future. Remember that consulting with a financial advisor or CPA is often a wise decision to tailor these strategies to your unique financial situation. With careful planning and execution, you can set yourself up for financial success in the year ahead.

Looking for an independent fiduciary financial advisor who can advise you on investments, retirement, real estate, alternative assets, and taxes? Contact ACap Advisors & Accountants to schedule a free initial consultation. Our clients include individuals, small businesses, entrepreneurs, and anyone serious about saving and investing for their future.