Year-end Tax Strategies

Nov 20, 2023

Before your brain goes full holiday-mode, as the year draws to a close, it’s time to consider some savvy end-of-year tax strategies. While it’s always better to plan throughout the year, here are two such strategies: tax loss harvesting and tax bracket stacking, which can help you optimize your tax situation.

Tax Loss Harvesting

Tax Loss Harvesting is a strategy that involves selling securities at a loss to offset a capital gains tax liability. This strategy is typically used to limit the recognition of short-term capital gains, which are generally taxed at a higher federal income tax rate than long-term capital gains. If your losses exceed your gains, up to $3,000 of those losses can be used to reduce your ordinary income. Any losses above $3,000 can be carried forward to the following year. So, if you’ve realized gains from your investments, you might be able to offset them with any losses you’ve incurred. Remember, though, that this strategy should be used in alignment with your overall investment strategy, and not just for tax purposes.

Tax Bracket Stacking

Tax Bracket Stacking is a method of managing your withdrawals from different accounts in a way that keeps you in a lower tax bracket. For W-2 employees, maximizing deductions to tax favored accounts is an easy way to lower your overall income, potentially dropping you into a lower tax bracket.

If you have yet to max out your contributions, increasing your contributions to a Health Savings Account (HSA) or a 401(k) can typically be modified before end of year payrolls are run.

For 2023, the maximum contribution limit for an HSA is $3,850 for single-filers and $7,750 for married filing jointly.  If you or your spouse are 55+, you can contribute an additional $1,000 as a catch up contribution.  Note:  both of you can make the $1K additional contribution but they must be to separate accounts.

Maximum contribution limits for a 401(k) in 2023 is $22,500. If you are over 50, or turned 50 in 2023, you can contribute an additional $7,500 for a total of $30,000.  Note that you have to request the additional contribution and it’s not automatic.

For self-employed individuals, it’s important to note that you have a bit more time to contribute to your retirement accounts. You can make contributions right up until the tax filing deadline (usually April 15th), and these contributions can still count towards reducing your taxable income for the previous year.

Talk to a Professional

Remember, these are just general strategies and may not be suitable for everyone’s individual financial situation. If you have questions or need further advice, it’s always a good idea to consult with a financial advisor or accountant. They can provide guidance tailored to your specific circumstances.

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