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Year-end Tax Planning Reminders

By: Tax Hotline
Fall 2023 (Vol. 41, No. 3)

1. Review your paycheck withholdings. Use the estimator at withholding-estimator to find out if you’ve been withholding the right amount or even to calculate your desired refund amount. File a new Form W-4 at your workplace if any adjustments are needed.

2. Max out your retirement and Health Savings (HSA) account contributions. For the 2023 tax year, the maximum allowable 401(k) contribution is $22,500, plus an additional $7,500 in catch-up contributions if you’re 50+. The maximum allowable IRA contribution for the 2023 tax year is $6,500, plus an additional $1,000 in catch-up contributions if you’re 50+. For HSA contributions, your maximum is $3,850 for individuals, $7,750 for families and an additional $1,000 for individuals age 55+.Your 401(k) contributions must be made by December 31, 2023 but you have until April 15, 2024 to make contributions to IRAs and HSAs. (Be sure to designate its for the 2023 tax year!)

3. If you are 73 or older, make sure you take any required minimum distributions (RMDs) from traditional retirement accounts by December 31, 2023. If you fail to take the RMD, you face a 25% excise tax on the amount you should have withdrawn. If you would rather not take that increase in your taxable income, you may want to consider a Qualified Charitable Distribution (QCD), directly from your qualified account to a public charity. The amount of your QCDs is limited to $100,000 per year.

4. If you owe estimated tax payments, make sure your payments are on track. The laws allows you to choose between the lesser of 110% of your actual tax liability for the preceding year, or of 90% of the current year. Payments can be made until January 15, 2024 to avoid interest charges.

5. Consider a Roth IRA conversion. If your income meets the eligibility requirements, you can convert some or all of the assets in a traditional IRA or workplace savings plan (e.g., 401(k)) to a Roth IRA. The big advantage of a Roth IRAs is that you don’t owe taxes on future withdrawals. The downside is that the year you convert those pre-tax contributions and all earnings are added to your gross income and taxed as ordinary income. For example, if you convert $100,000 from your 401(k) to a Roth, you will pay taxes as if you earned $100,000 this year. You don’t have to convert the entire account in the same year. It is recommended to convert amounts only to the level where you remain in your current tax bracket.

6. Harvest losses to offset gains. Review your portfolio. If you anticipate paying a high tax bill, this may be a good year to cash out any losing positions. The IRS will let you apply up to $3,000 in losses against your other income, and you can carry over the remaining losses to offset income in future years.

7. Schedule your expenses to maximize your ability to itemize. Itemized deductions include medical and dental expenses, deductible taxes, mortgage interest, charitable contributions and casualty, disaster and theft losses. In order to itemize, your expenses in each category must be higher than a certain percentage of your adjusted gross income (AGI).

If you’ve been putting off any medical or dental expenses or planning a charitable contribution, you might want to group these expenses to take the most advantage of itemizing the deductions. For example, for the 2023 tax year, the threshold for itemizing medical expenses is 7.5% of your AGI.

If your expect your medical expenses will total only 6.5% of your AGI for 2023, you may consider moving early 2024 appointments to late 2023 if it will help you reach the 7.5% required to itemize.

8. Check your flexible spending account (FSA) balance. You will pay taxes on any amount left in your FSA on December 31, 2023. Make a plan now to spend those funds. Schedule any last-minute check-ups and eye exams by December 31. Fill prescriptions for you and your family. You can also get those new eye glasses you were wanting or stock up on items approved for FSA spending such as bandages and contact lenses.