Year-End Tax Planning for Individuals

As we approach the end of the year, it's the perfect time to focus on tax planning. Effective strategies can significantly increase your savings and enhance your financial well-being after tax season. Let's explore some key planning aspects to consider.

Projecting Your Income

Begin by estimating your expected total income for the year. This should encompass your salary, business income, interest, dividends, capital gains, and any other income sources. Remember to account for any anticipated end-of-year bonuses or sporadic income sources. Understanding your current income lays the groundwork for effective tax planning in future years.

Understanding Your Tax Bracket

Familiarize yourself with the federal and state tax brackets that apply to your income level. This knowledge is crucial for making informed decisions regarding deductions and the timing of realizing capital gains or losses. Here you can find the 2023 federal income tax brackets.

Evaluating Retirement Plan Conversions and Contributions

Consider whether converting traditional IRA or 401(k) funds into a Roth IRA is beneficial, especially if you expect to be in a higher tax bracket in the future. Keep in mind that such conversions will incur tax liabilities. Contributing the maximum amount to any qualified retirement plans and Individual Retirement Accounts (IRAs) is a great way to maximize your deduction for the year. For 2023, the maximum elective contribution to a 401(k) or 403(b) plan is $22,500. For those age 50 or over, the limit is higher – $30,000 if the plan permits "catch-up" contributions.

Year-End Deductions and Planning

Make any planned charitable donations before the year concludes to leverage deductions. Grouping deductible expenses, like medical costs and property taxes, can help you surpass the threshold for itemized deductions [See Related: Freidel & Associates LLC | Bunching Itemized Deductions: Maximize your Tax Savings].

Reviewing Tax Credits

Make sure to look into all applicable tax credits, including the Earned Income Tax Credit, Child Tax Credit, and Education Credits.

Managing Capital Gains and Losses

If your tax bracket in the current year is lower than normal, consider selling investments that have appreciated in value that you’d like to liquidate. If you have appreciated investments, also don’t neglect to consider donating them, as that can be particularly tax-efficient. Also, consider the timing of selling assets that are currently in a loss position. Realizing these losses can offset gains and reduce taxable income, which is especially beneficial when you are in a high tax bracket in a given year.

Year-end tax planning is an integral aspect of managing your personal finances. By reviewing your income, understanding your tax situation, and exploring various tax-saving opportunities, you can significantly enhance your financial position for the new year. Consulting with a tax professional can further tailor these strategies to your unique circumstances, ensuring you make the most of your financial planning.

Please consult your tax advisor to understand any potential tax planning strategies. When we face more complex situations, we often run multi-year simulations to understand the financial benefit and trade-offs of different strategies.