As the end of the year approaches, it’s the perfect time to take proactive steps to optimize your tax position before filing. Year-end tax planning is a strategic process that helps you maximize deductions, minimize liabilities, and ensure compliance with tax laws. By taking advantage of certain strategies, you can set yourself up for a smoother tax filing season and potentially reduce your tax burden.

What to Do Before Filing Your Taxes.

Maximize Retirement Contributions.

One of the simplest yet most impactful strategies for reducing your taxable income is to maximize contributions to your retirement accounts. Contributions to tax-advantaged accounts like a 401(k) or a traditional IRA are typically tax-deductible, lowering your taxable income for the year.

For 2023, the contribution limit for a 401(k) is $22,500, with an additional $7,500 catch-up contribution allowed for those aged 50 or older. For IRAs, the limit is $6,500, with a $1,000 catch-up contribution for those 50 and older. By contributing as much as possible before the year ends, you can not only save for retirement but also reduce your immediate tax liability.

Review Tax-Loss Harvesting Opportunities.

If you’ve experienced losses in your investment portfolio, consider using tax-loss harvesting to offset capital gains. By selling underperforming investments, you can use the losses to reduce taxable gains, potentially lowering your overall tax liability.

If your losses exceed your gains, you can use up to $3,000 of excess losses to offset other types of income. Any remaining losses can be carried forward to future tax years. Be mindful of the wash-sale rule, which prevents you from repurchasing the same or substantially similar security within 30 days of selling it.

Accelerate Deductions and Defer Income.

Another effective strategy is to accelerate deductible expenses into the current tax year while deferring income to the next year. This is particularly useful if you expect your tax rate to be lower in the following year.

For example, you can prepay mortgage interest, property taxes, or medical expenses before December 31 to claim those deductions on your upcoming tax return. Similarly, consider deferring end-of-year bonuses or freelance income until January to reduce your taxable income for the current year.

Take Advantage of Charitable Contributions.

Charitable giving is not only a meaningful way to give back to your community but also an effective tax planning tool. Donations made to qualified charitable organizations are tax-deductible, provided you itemize your deductions.

Keep detailed records of your contributions, including receipts and acknowledgment letters from the charities. If you donate non-cash items, such as clothing or household goods, ensure they are in good condition and estimate their fair market value.

For larger donations, consider donating appreciated assets like stocks or mutual funds. This allows you to avoid paying capital gains taxes on the appreciation while still receiving a tax deduction for the asset’s full market value.

Hire a Qualified Accountant.

One of the most effective ways to optimize your year-end tax planning is to consult with a qualified accountant. Tax laws are complex and constantly changing, and a professional can help you navigate these changes to maximize your deductions and credits.

An accountant can also help you identify overlooked opportunities, such as tax credits for energy-efficient home improvements or education expenses. They’ll ensure your tax return is accurate and compliant, reducing the risk of costly mistakes or audits.

Simplify Your Taxes.

Freedom Financial Wealth Building Group, LLC has the experience and insights needed to help you position yourself optimally before you file your taxes this year. We empower your wealth journey by fostering financial freedom and cultivating your vision with professional tips and tricks to maximize your taxes. Learn more about our services online, or contact us to request your free consultation.