Tax Optimization in 2023: Last-Minute Year-End Moves

As the year draws to a close, and with only a few weeks left in 2023, there are last-minute moves you can make to reduce your tax liability and maximize your savings.

Charitable Giving Strategies

When it comes to tax optimization, charitable giving can be a powerful tool. Here are two strategies that can help taxpayers make the most of their charitable donations:

Donor-Advised Funds

One strategy for charitable giving is to use a donor-advised fund (DAF). A DAF is a charitable investment account that allows taxpayers to make a charitable contribution, receive an immediate tax deduction, and then recommend grants from the fund to their favorite charities over time.

Talk with your tax advisor about whether it makes sense to contribute this year or plan for 2024.   Your current higher standard deduction may be more beneficial for your household.

Tips to make the best of charitable contributions: 

–       Bunch your charitable contributions. This involves making two or three years’ worth of charitable contributions in a single year in order to exceed the standard deduction and itemize deductions on their tax returns.

For example, if you typically donate $5,000 per year to charity, you could instead donate $15,000 in a single year and then skip donations for the next two years. This would allow you to itemize deductions in the year of the large donation and then take the standard deduction in the following years.

Bunching Deductible Expenses

Add up all your deductible expenses (I.e., qualified medical, homeowner’s deductions, and charitable donations) in one year.  You may benefit from itemizing your deductions over taking the standard deduction. 

For example, if you donate $5,000 2023 to a qualified charity, spend $10,000 in qualified medical expenses, and have deductible expenses on your home, these could add up to a larger deduction than if you were to take the $13,850 standard deduction in 2023.

Harvesting Tax Losses

One way to reduce your tax bill is to “harvest” tax losses. This involves selling investments that have lost value so you can use those losses to offset gains in other investments.

Note: There are rules around tax loss harvesting, including the “wash sale” rule, which prohibits investors from buying a “substantially identical” security within 30 days of selling the original security.

Maximizing Retirement Contributions

Traditional IRA Contributions (not to confuse with Roth IRAs)

Contributing to a traditional IRA can be a great way to reduce taxable income and increase retirement savings. In 2023, the maximum contribution limit for an IRA is $6,500, $7,500 for those over 50.

Note: Traditional IRAs have income limits to be deductible. The good news is that you can contribute to these plans by April 15, 2024. This means you can find your Modified Adjusted Gross Income before making your contribution for TY 2023. I encourage you to have a conversation with your tax advisor about this opportunity.

Tax Moves for Business Owners

As the year draws to a close, business owners have a number of last-minute tax optimization moves they can make to reduce their tax liability. Here are two options to consider:

Equipment Purchases

One option for business owners looking to reduce their tax liability is to purchase new equipment before the end of the year. By doing so, you can take advantage of the Section 179 deduction, which allows you to deduct the full cost of qualifying equipment purchases in the year they are placed in service. The maximum deduction for 2023 is $1,160,000 ($1,220,000 for 2024). Please consult your tax advisor about qualifying expenses and the phase-out threshold.

Qualified Business Income Deduction

Business owners can use the Qualified Business Income (QBI) deduction. This deduction allows eligible taxpayers to deduct up to 20% of their qualified business income from a partnership, S corporation, or sole proprietorship. To qualify, the business must be a qualified trade or business, and the owner must meet certain income thresholds.

Overall, business owners have several options to consider regarding year-end tax optimization.

By taking advantage of these opportunities, you can reduce your tax liability and keep more of your hard-earned money.

Rosario Chacón is a Certified Financial Planner™ and an Enrolled Agent. This information is provided for educational purposes and should not be considered advice.  Please consult your tax adviser regarding your personal situation.​​

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The information contained herein is intended to be used for educational purposes only and is not exhaustive. Diversification and/or any strategy that may be discussed does not guarantee against investment losses but are intended to help manage risk and return. If applicable, historical discussions and/or opinions are not predictive of future events. The content is presented in good faith and has been drawn from sources believed to be reliable. The content is not intended to be legal, tax or financial advice. Please consult a legal, tax or financial professional for information specific to your individual situation.

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