tax saving

8 Tax-Saving Moves Before Year End

Tax-saving talks might not be as exciting as turkey feasts or unwrapping gifts, but getting a head start on your tax planning can make a difference.

Waiting until the last minute to scramble for deductions or attempt a complex financial move might add unnecessary stress to an already busy season. Financial professionals are often busy at this time, making it challenging to secure their attention when you need it most.

Besides, wouldn’t you rather be sipping hot cocoa or sharing laughs with loved ones than stressing over tax forms?

To make things smoother, here’s a breakdown of eight tax-saving moves to consider before the year ends.


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8 TaxSaving Moves Before year End

Utilize Flexible Spending Accounts Before They Vanish

Flexible Spending Accounts(FSAs) are fringe benefits that allow employees to contribute a portion of their earnings to the account and not be taxed for income and Social Security taxes.

However, there are two catches:

  • distributions can only be used for medical and childcare expenses
  • they have a “use it or lose it” rule.

Therefore, if you don’t use everything you contributed to the account by the end of the year, you forfeit the excess. 

With the year’s end approaching, check to see if your employer has adopted a 2.5-month grace period. If not, make a last-minute trip to the drug store, dentist, or optometrist to use the funds in the account.

Give to Your Favorite Charity

Supporting a cause or charity not only allows you to contribute to a meaningful cause but can also help you save on taxes. However, you need to itemize your tax return to claim charitable donations. This means that your total deductions must exceed your standard deduction. The standard deduction is a flat amount the IRS allows you to reduce your tax bill based on your filing status.

For the 2023 tax year, the standard deductions are:

  • $13,850 for single and married-filing-separately taxpayers
  • $20,800 for head of household taxpayers
  • $27,700 for married-filing-jointly or qualifying widow(er) taxpayers

For people who are over 65 or blind, the standard deduction increases. 

But before giving, check if your charitable organization can receive tax-deductible donations. You can discover the latest information on the nonprofit using the IRS’s Tax Exempt Organization Search Tool and Guidestar.

Before you find yourself scrambling at the last minute next year, consider these questions:

  • Have you supported the organization that you intended?
  • Did you contribute the desired amounts as planned?
  • If you set up recurring donations, would it align better with your giving goals?

Balance Your Taxable Investment Accounts

While tax harvesting should ideally be completed throughout the year, if you haven’t done it yet, now is the time. Tax-loss harvesting is using your investment losses to lower your capital gains taxes. Making investment losses shows the IRS that you made money from some investments but also lost money from others. Therefore, when equaled out, you shouldn’t owe as much tax. If your capital losses exceed your gains, you may deduct up to $3,000 (or $1,500 if filing single or married filing separately) to reduce your taxable income. 

If creating losses isn’t an issue for you (e.g., your income is low or you have a business loss), utilize tax-gain harvesting. Tax-gain harvesting, the opposite of tax-loss harvesting, helps individuals take advantage of their lower tax brackets by selling investments at a gain. 

Tax harvesting helps sell assets for a loss or a gain and buy a similar investment to take advantage of tax opportunities while maintaining a diversified portfolio.

Review Contributions to Retirement Accounts

If your employer offers a retirement plan with employer match, don’t forget to contribute enough to grab your employer match. Not only is an employer match free money, but your contributions can also reduce your taxable income. The IRS contribution and employer match limit generally change yearly, so it’s important not to assume your limits will be the same as last year. 

Due to Secure Act 2.0, you might have gained a Roth 401k retirement account as part of your employer’s plan. Unlike a traditional 401k, a Roth 401k is funded with after-tax dollars. It is essential to outweigh the long-term tax benefits to determine if contributing pre-tax or after-tax dollars is more beneficial. 

Contribute to a Health Savings Account 

Another way to reduce your tax bill is to contribute to a health savings account (HSA). HSA contributions are tax-free and can help you save on qualified health care expenses. Some eligible expenses include prescription drugs, vision, dental, and doctor’s exams. Unlike flexible spending accounts, HSA balances accumulate interest tax-free and rollover year over year. Therefore, HSAs can be used for more long-term health care expenses, like long-term care, major surgery, or unexpected expenses. 

The catch is that only some qualify. To qualify, you must have an employer who offers a high-deductible health plan with access to an HSA. Those listed as dependents on someone else’s tax return or enrolled in Medicare don’t qualify.

Double-check Tax Withholdings

Reviewing your tax withholding can determine if you have deducted the right amount of taxes from your paycheck. If you had a significant employment or life change, such as a change in marital status, increase in income, or purchase of a new home. In that case, review your tax withholding before you receive surprises on tax day. 

If you do not withhold enough taxes, you may face a large tax bill when you file your income taxes. In contrast, if you withhold too much and receive a significant tax return, you may lose an opportunity to maximize your monthly paycheck.

Utilizing the IRS tax withholding estimator, you can determine if you’ve withheld the correct amount.

Decide if You Want to Gift Money to Family or Friends

As the year draws close, it’s an opportune time to contemplate gifting money to your family or friends. Consider this an intentional move, a gesture that expresses your care and support and potentially yields tax advantages. Giving up to $17,000 this year ($34,000 if you are married) allows you to pass on assets without paying gift tax, filing a gift tax return, or tapping into your lifetime exemption. Also, recipients don’t owe any gift taxes. Gifting each year is a way to enrich the lives of your loved ones while using up your annual gift tax exclusion before it’s gone forever.

Create an IRS Online Account

Before the tax season gets into gear, now is the time to set up an IRS account. An IRS account provides balances, digital copies of notices, and prior tax records without speaking to a representative. 

To create an account, you must create a login with the IRS and verify your identity. You’ll need to provide a photo of yourself, such as a driver’s license, state ID, or passport. As well as a selfie of yourself

Even though you haven’t received your W2s and 1099s yet, creating your account now can save you time during the tax season since you will not need to complete the identification verification process.

Remember, these tips are like the appetizers before the feast. Consider consulting a tax professional for a personalized strategy that aligns perfectly with your financial situation.

So, why stress about tax tasks when you can plan ahead and enjoy a stress-free holiday season?

Cheers to a season filled with joy, laughter, and savvy tax planning!

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Financial Planner, Tax Professional at Spark Financials | Website | + posts

Danielle Miura, CFP®, EA, is the founder of Spark Financials, a life and financial planning firm specialized in helping those planning for retirement to organize, simplify, and empower them through every life turn. As a CERTIFIED FINANCIAL PLANNER™ professional, I help my clients protect their assets, manage their wealth, and dream about their future.

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