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The end of the year is a great time to start thinking about your tax planning. By taking some time to plan now, you can potentially save yourself a lot of money next year.
Here are some year-end tax planning tips for 2023:
1. Review your income and deductions.
The first step in year-end tax planning is to review your income and deductions for the year. This will help you to identify any areas where you can save money on your taxes.
Income: When reviewing your income, be sure to include all sources of income, such as wages, salaries, bonuses, investment income, and business income. You should also include any estimated tax payments that you have made during the year.
Deductions: There are a wide variety of deductions that you may be able to take on your taxes. Some common deductions include:
- Mortgage interest
- State and local taxes
- Charitable contributions
- Medical expenses
- Business expenses
If you are not sure what deductions you are eligible for, you may want to consult with a tax professional.
2. Maximize your retirement contributions.
One of the best ways to reduce your taxable income is to maximize your retirement contributions. For 2023, the maximum contribution limit for 401(k) plans is $22,500 ($30,000 if you are age 50 or older). The maximum contribution limit for IRAs is $6,000 ($7,000 if you are age 50 or older).
If you are not able to contribute the maximum amount to your retirement plan, try to contribute as much as you can afford. Even small contributions can add up over time.
3. Harvest capital losses.
If you have any capital losses from the sale of investments, you may be able to offset those losses with capital gains. This can help to reduce your taxable income.
To harvest capital losses, you simply need to sell investments that have lost value. You can then offset those losses with capital gains from the sale of other investments. If you do not have any capital gains to offset your losses, you can deduct up to $3,000 of capital losses per year on your tax return.
4. Make charitable contributions.
Charitable contributions can be a great way to reduce your taxable income. You can deduct charitable contributions of up to 60% of your adjusted gross income (AGI) on your tax return.
If you are planning to make a large charitable contribution, you may want to consider donating appreciated assets, such as stocks or bonds. This will allow you to avoid paying capital gains taxes on the appreciated value of the assets.
5. Prepay state and local taxes.
If you itemize your deductions on your tax return, you can deduct state and local taxes. If you are expecting to owe a large amount of state and local taxes next year, you may want to consider prepaying some of those taxes before the end of the year. This will allow you to deduct those taxes on your current year’s tax return.
6. Consider a Roth conversion.
If you have money in a traditional IRA, you may want to consider converting it to a Roth IRA. This will allow you to grow your money tax-free in the Roth IRA.
To qualify for a Roth conversion, you must meet certain income requirements. You must also pay income taxes on the amount of money that you convert. However, you may be able to save money on taxes in the long run by converting your traditional IRA to a Roth IRA.
7. Get professional advice.
If you have any complex tax questions, you may want to consult with a tax professional. A tax professional can help you to identify all of the deductions and credits that you are eligible for. They can also help you to develop a tax plan that will minimize your tax liability.
Additional tips for year-end tax planning:
- If you are self-employed, be sure to make estimated tax payments throughout the year. This will help you to avoid paying a large tax penalty at the end of the year.
- If you are expecting a tax refund, you may want to consider having the refund deposited directly into your savings account. This can help you to start saving for the next tax year.
- If you are expecting to owe taxes next year, you may want to consider making a quarterly estimated tax payment. This will help you to avoid paying a large tax penalty at the end of the year.
By following these year-end tax planning tips, you can potentially save money next year and get off on the right start for 2024.
Let an expert do your taxes for you, Peter Messineo is an experienced CPA who will ensure your taxes are processed correctly and will ensure deductions claimed are within the limits of the tax code. Contact our Zephyrhills, Florida office today at https://bm-tax.com/contact/ 813-788-3378