We’ve all been there—it’s the end of the year, and if the holidays weren’t stressful enough, you’re also realizing that you had an especially prosperous year, which means your tax burden is higher (perhaps even much higher) than expected. It feels like a deadline is approaching, and you know you need to make some adjustments. Luckily, there are some key actions you can take.
Whether you are on the cusp of the next income bracket, realized greater returns on your investments than anticipated, or were awarded a raise that changed your financial situation, there are a handful of quick and easy ways to reduce your tax burden.
Of course, we always recommend speaking with a CPA before making any changes to your tax strategy. Please remember the information below is general, and the best tax advice you can get is the tax advice that is specific to your situation.
Let’s dive in.
Increase Pre-Tax Contributions
Increase pre-tax contributions to your traditional IRA, 401(k), 403(b), and other pre-tax retirement plans
Pre-tax contributions to retirement are considered above the line deductions, meaning they lower your adjusted gross income (which is used to calculate your tax burden). These accounts are tax-deferred, which means you do not pay income taxes until you withdraw. If your plan is managed by your employer, speak to them directly about increasing your contribution for December or making a one time contribution of a larger amount.
- IRA contribution limit for 2023 is $6,500 ($7,500 if you are over 50)
- 401(k) and 403(b) contribution limit for 2023 is $22,500 ($30,000 if you are over 50)
Keep in mind that when it comes to traditional IRAs, there can be limitations and income caps. Definitely speak with a CPA for specifics before banking on this tax-reducing strategy.
Contribute to an HSA and (maybe) FSA
Increase contributions to a Health Savings Account, and (maybe) a Flexible Spending Account.
An HSA, Health Savings Account, is a savings account designed for folks with high deductible health insurance plans (but available to most individuals, regardless of deductible). These funds can be used for medical costs like copays, prescriptions, deductibles, crutches, hearing aids, glasses, contraceptives, and more.
The benefit of contributing to an HSA is that you contribute pre-tax funds, meaning that any money you contribute to your HSA is tax-deductible and will help lower your tax burden. There are limits to how much you can contribute.
- HSA contribution limit for 2023 is $3,850 ($4,850 if you are over 50)
- HSA contribution limit for 2023 for families is $7,750 ($7,750 if you are over 50)
An FSA, Flexible Spending Account, is similar to a Health Savings Account, but with the purpose of setting aside money to cover medical, dental, and vision expenses not covered by insurance, especially dependent care expenses. It can also be used for dependent care (like after school programs) and elder care. These contributions are pre-tax, meaning they are tax-deductible and will help lower your tax burden. However, it’s important to remember many FSAs are “use it or lose it” accounts, meaning you have to use the funds within a specified time window. It’s important to have a firm understanding of these timelines, because depending on the specifics, this contribution may not be the right tax-reducing plan for you.
- HCFSA contribution limit for 2023 is $3,050
- DCFSA contribution limit for 2023 is $5,000 per household ($2,500 if married, filing separately)
Offset Your Capital Gains
Utilize tax-loss harvesting to offset your capital gains.
You’ve probably heard the term tax-loss harvesting. Essentially, the goal is to strategically sell off your losses in order to offset your capital gains. When the losses offset the capital gains, up to $3,000 in losses can be used to offset your gains. It’s a great strategy to offload stocks, bonds, and mutual funds that are underperforming and reduce your tax burden by offsetting your capital gains.
We won’t sugar coat it—tax loss harvesting gets incredibly complicated, and it can impact your future financial situation quickly. Please speak with a CPA and/or Financial Advisor before employing this strategy.
(Maybe) Contribute to a 529 Plan
Make contributions to your 529 plans (if it benefits your STATE tax return)
A 529 Plan is an education savings plan primarily intended for college tuition, books, supplies, etc., and for K-12 tuition (with limits). Contribution to a 529 is a great way to reduce your tax burden because the contributions tend to be high (they vary by state) and the account is tax-deferred, meaning it grows tax-free.
However, one major caveat here – the contributions to a 529 plan are not deductible on a federal level. You may be able to deduct them on your state tax return, depending on where you live.
Have a CPA Review Your Income and Tax Situation—Before Dec. 31st!
Get advice from a CPA when you can still make changes that impact your 2023 taxes.
One of the most overlooked ways (and yet, inarguably the simplest) to reduce your taxable income is to have a CPA review your income and tax situation before year’s end… when you can still do something about it.
CPAs don’t just prepare and file your tax return, they can also take a strategic and detailed look at how your finances are structured, ways you might be able to retain more of your income, and how to take advantage of taxable income reducing opportunities that set you up for the future.
As we say in our business, it might just be the difference of one day, but sometimes the difference between huge savings and overpaid taxes is simply doing something on December 31st instead of January 1.
So, take care, and remember that you have options. If you are concerned about your taxable income, speak to a CPA today.
