3 Tax Strategies You'll Want to Take Advantage of Before the Year Ends Carmichael Hill

We know that your retirement strategy may not be front and center in your mind as the holiday season approaches. But it’s actually a great time to button up your tax plan as the year draws to a close. Most people are calendar year taxpayers, meaning that the tax year closes on December 31st. With so few opportunities available following the closure of the tax year, now is a great time to make the necessary moves to optimize your finances and keep your taxes to a minimum.

 

  1. Using the Annual Gift Tax Limit

For 2023, you can give away up $17,000 to an unlimited number of individuals without incurring gift tax or using any of your lifetime gift exemption.[1] Gift tax is not the same thing as the income tax you pay on your salary or the capital gains taxes you pay on your investments. This is a type of transfer tax. It was put in place to prevent people from skirting estate taxes by giving away everything just before death.

The lifetime gift tax exemption is now $12.92M per person, which means that going over the $17,000 annual limit still won’t trigger tax for most people. However, going over the annual gift limit does require you to file form 709 with your taxes, which is an extra hassle and typically comes with added cost if you’re paying someone to prepare your taxes.

The $17,000 limit is per person, so a married couple could give $34,000 to each of their children in 2023 without any gift tax issues or extra tax forms.[1] For those with large estates north of the $12.92M mark (double if married), getting your annual gifts done before the end of the year can help play a role in minimizing your estate tax liability. And it’s easy. No forms. No tax. No headaches.

 

  1. Tax-Loss Harvesting

The concept behind tax-loss harvesting is to sell an investment at a loss (i.e. less than what you paid for it) and either buy something incredibly similar with the proceeds or repurchase what you initially sold at a future date. Intentionally selling something when its lost value may seem counterintuitive, but there are tax benefits available for losses that make this strategy worthwhile. Selling in this case does not mean spending. If the funds aren’t reinvested then it isn’t tax loss harvesting. This should also only be done in taxable investment accounts.

The reason this is advantageous is because up to $3,000 of losses can be used to offset your taxable income in any given year. If your losses are more than this then you can carry them forward to future tax years until they’re all used up. Or, use those losses to offset taxable gains in other areas of your portfolio.

It’s easiest to see it in an example: Say Joan bought $50,000 worth of the Vanguard S&P 500 ETF and sold it this year for $41,000. She immediately reinvests that $41,000 into the iShares S&P 500 ETF, which passively tracks the same index. She recognizes a -$9,000 loss on the trade without sacrificing any time out of the market or altering her allocation – she’s still in a passive S&P 500 index fund.

She can use -$3,000 of those losses to reduce her taxable income this year while carrying the remaining losses forward to be used in 2024 and 2025 (i.e. $3,000/year for three years). Alternatively, she can use these losses to offset gains in other areas of her portfolio. So long as the gains from the next sale aren’t more than the $9,000 of losses she has already recognized, Joan won’t have any tax consequences on the sale.[2]

Beware of wash sales. If you buy and sell a “substantially identical” security within a 30-day window then the tax benefits of tax loss harvesting will be undone.

 

  1. Catch-Up Contributions and Maxing Out Your Yearly Contributions

Annual contribution limits exist for every retirement account. As we head towards the year-end (particularly for those over 50 who can use catch-up contributions), consider reaching your contribution limits and continuing to contribute as the new year starts. This can help you reduce your taxable income for the year while staying on track for retirement.

Remember, employer sponsored retirement plans like 401(k)s and 403(b)s can only be funded with salary deferrals. You can’t transfer money sitting in your bank account. Make sure you work with HR and payroll to adjust your deferral amounts if you’re not on track to max out by the end of the year and would like to.

 

Keeping track of tax laws and executing tax strategies is no easy task. You may have the right idea when attempting to execute your own tax minimization strategy, but you could end up with a much larger tax burden if you aren’t aware of the minutia of tax and retirement laws, how they change each year, and how those changes may affect your short- and long-term tax strategy. If you’re curious about what you should do or how to do it, then schedule a time to chat with us for a no cost/no obligation review of your finances. We can help.

 

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