Five Ways You May Reduce Your 2023 Tax Bill
There is still time to implement some of these tax reducing strategies before you say good-bye to 2023 and welcome in 2024.
From fully maximizing your tax-advantaged accounts to donating to charities, here are five tax strategies to consider before the ball drops on New Year’s Eve.
1. Max Out Your 401(k)
Minimize Taxable Income
Contributing to your tax-deferred employee sponsored retirement plan is one the best (and easiest ways) to reduce your taxable income for the current year. In 2023, you were able to contribute $22,500 if you were under 50 and $30,000 if you were 50 or older.
If you fell a little short on maximizing your 401(k) contributions this year, it’s OK – you can avoid that happening in 2024 by being proactive with your planning. The amount you can contribute to your 401(k) increases in 2024.
2024 Contribution Limits
- $23,000 if you’re under 50 and,
- $30,500 if you’re 50 or older.
Bonus tip for your 401(k) contributions!
Most employers will match a certain amount or a percentage of your 401(k) contributions. Contributing to your 401(k) helps you proactively save for retirement AND it can also enable you to earn “free money.”
Mega Backdoor Roth
Fully maximize your 401(k) by using the Mega Backdoor Roth provision. If your 401(k) plan includes this feature, we encourage you to take advantage of it.
The Mega Backdoor Roth enables you to contribute after-tax dollars, up to a pre-determined limit, either set by your employer or the federal limit, and convert those dollars to Roth. Within the Roth these dollars and the interest earned grow tax-free and can be tax-free when accessed in retirement.
If you work at Microsoft, Amazon, Meta, Nike, NVIDIA, Intel, – -good news! you have this provision within your 401(k).
Many high-income earners find they are not eligible to contribute to a traditional Roth IRA due to income limits. The Mega Backdoor Roth is a great tax-advantaged saving strategy to consider.
2. Max Out Your Health Savings Account (HSA) Contributions
Your HSA allows you to set aside pre-tax dollars to pay for qualified medical expenses.
Contributing to an HSA is another excellent way to lower your annual taxable income and if you can max-out your contributions – even better!
2023 HSA contribution limits:
- $3,850 for individual coverage and,
- $7,750 for family coverage.
- If you’re 55+ you can contribute an extra $1,000 as a catch-up contribution.
Health Savings Accounts offer a triple tax advantage:
- Contributions to your HSA are tax deductible.
- Your money grows tax-deferred within the account.
- You can withdraw money from your account tax-free if the funds are used for qualified medical expenses.
The money you contribute to an HSA is yours to keep, it will roll over year to year if you don’t spend it. Consider using it as part of your long-term saving strategy by investing your HSA dollars. Your invested funds will benefit from tax-free growth. An HSA can help supplement your retirement savings. After 65, you can withdraw money penalty-free for any purpose, but it becomes taxable income.
Like your 401(k), if you aren’t going to max out your HSA contributions this year, it’s OK – you can make a plan now to fully fund it in 2024. The amount you can contribute to your HSA will increase next year.
3. Make Charitable Contributions
Donor Advised Fund (DAF)
One of the most efficient ways to give back to your community while maximizing your tax benefits is using a Donor Advised Fund (DAF). Here are a few reasons why you may want to consider using a DAF:
- They are easy to use. You can support multiple charities with a single contribution and simplify your giving.
- Receive an immediate tax deduction. You can contribute cash, stocks, or other assets to the fund.
- Invest your contributions. There is potential for your assets to grow tax-free.
- Easily oversee your giving. Recommend grants from the fund to charities you care about. The organizations need to be qualified 501(c)3.
Charitable Match from Your Employer
Check to see if your company will match your charitable contributions. This is a benefit that many companies provide – it essentially doubles your donation to qualified charitable organizations.
If you work at Microsoft[1], the company will match your charitable donations dollar-for-dollar up to $15,000. Nike employees can utilize the “Give Your Best” platform to match donations to qualified organizations up to $25,000 per year[2].
4. Utilize Tax-Loss Harvesting
Tax-loss harvesting is a strategy that can possibly help reduce taxes on your investments.
Tax-loss harvesting is a strategy that can possibly help reduce taxes on your investments.
Overview on how tax-loss harvesting works:
- Review the investments in your portfolio.
- Find any that are currently worth less than what you originally paid for them. These are “unrealized losses” – losses that only exist on paper.
- If you have any investments that show gains this year, you can sell the ones currently at a loss to cancel out the gains and lower your taxes.
This may help reduce your taxable income. The IRS allows you to deduct up to $3,000 in capital losses each year from your ordinary income, or $1,500 if you’re married filing separately. Be mindful of the wash-sale rule, which prohibits you from claiming a loss on a security if you repurchase a “substantially identical” security within 30 days before or after the sale.
5. Consider a Roth Conversion
A Roth conversion involves moving money from a traditional IRA or 401(k) into a Roth IRA.
This converts the money from pre-tax to after-tax. This strategy involves paying taxes now in exchange for tax-free growth and withdrawals in retirement.
It’s important to note that making the decision to do a Roth conversion carries both short-term and long-term implications. You’ll want to assess short-term tax consequences and consider your current and future tax brackets.
When you make the conversion, you pay income taxes on the amount converted for that tax year. Depending on the size of the conversion, you could have a large tax bill for the year, however, it does eliminate taxes on future growth and qualified withdrawals.
There are income limits on who can directly contribute to a Roth IRA. But anyone can do a Roth conversion – there are no income limits. Always consult with a tax professional and/or a financial advisor to ensure that you are making the best decision for your situation.
Take a Proactive Approach to Tax Planning
We can’t avoid paying taxes. However, making small shifts like bumping up 401(k) contributions, properly utilizing HSAs, or making donations to organizations you care about have the potential to add up to thousands in savings each year.
Maximizing your retirement contributions should be a priority.
The tax-deferred compound growth can have a significant and positive effect on your future income needs. But don’t ignore the other strategies that can also help reduce taxable income.
Plan Now to Minimize Your 2024 Tax Bill
We encourage you to get a head start on your 2024 taxes by implementing these strategies at the beginning of the new year. Take control of your taxes – being proactive now sets you up for long-term savings. Reach out to schedule time to discuss your situation.