The clock is ticking for taxpayers who want to minimize what they will pay the government next spring. When the calendar turns to the new year, the door will close on some tax-saving strategies.
That means now may be the time to consider things such as Roth conversions and harvesting investment losses. Here are nine tax tips for 2023 to beef up your savings and minimize the amount of income tax you’ll pay:
— Make 401(k) and HSA contributions.
— Schedule your RMD for 2023.
— Convert money from a traditional IRA to a Roth IRA.
— Contribute to a 529 Plan.
— Hold off on mutual fund purchases.
— Harvest your capital losses.
— Pick up capital gains if you’re in a low tax bracket.
— Harvest losses on cryptocurrency.
— Meet with your tax advisor.
1. Make 401(k) and HSA Contributions
People can make tax-deductible contributions to traditional IRAs and health savings accounts up to April 15 of next year. However, the deadline for 401(k) contributions is Dec. 31. “There’s no way to make additional contributions (after the new year),” says Eric Bronnenkant, head of tax for Betterment, a financial advisory company.
Tax-deductible contributions to a traditional 401(k) are capped at $22,500 for 2023. Workers age 50 and older can make an additional $7,500 in catch-up contributions.
While you have until tax day to make HSA contributions, maxing those out sooner rather than later ensures you don’t miss the deadline. Taxpayers with a qualified high-deductible family health insurance plan can deduct up to $7,750 in contributions to a health savings account in 2023. Individuals with self-only coverage can deduct $3,850. Those age 55 or older are eligible for an additional $1,000 catch-up contribution.
[Read: How to File an Amended Tax Return]
2. Schedule Your RMD for 2023
Normally, retirees who have a traditional 401(k) or IRA must take a required minimum distribution each year once they reach age 73. Depending on the size of a person’s retirement account, this distribution can be sizable and result in a significant tax bill.
In the past, failing to take out an RMD would result in a 50% penalty, according to Craig Ferrantino, president of Craig James Financial in Long Island, New York. “That’s … painful,” he says.
The SECURE 2.0 Act reduced that penalty to 25%. And if you correct your mistake in a timely manner by taking out the RMD, you’ll only be penalized 10%. Still, it would be better to pay no penalty at all.
3. Convert Money From a Traditional IRA to a Roth IRA
Withdrawals from traditional IRAs are taxed in retirement, but distributions from Roth IRAs are tax-free. Plus, Roth IRAs don’t have required minimum distributions, which can also be beneficial for those looking to reduce taxes in retirement.
Fortunately, the government allows you to convert money from traditional accounts to Roth accounts to get these benefits. When money is converted from a traditional to a Roth account, taxes must be paid on the converted amount.
With some concerned about tax rates rising in the future, it may be best to not delay making any planned conversions. “If we’re going to do a Roth conversion, this is the year to do it,” Ferrantino says.
[Related:Key Takeaways From Your 2022 Taxes]
4. Contribute to a 529 Plan
Families with children can use 529 plans to prepare for college expenses and save on their state income taxes next spring. Most states offer a state income tax deduction for contributions made by residents to a state-sponsored plan. However, a handful of states may allow a deduction for contributions to any state’s 529 plan.
While there is no federal tax deduction for 529 contributions, money in these plans grows tax-free and can be withdrawn tax-free when used for qualified education expenses.
5. Hold Off on Mutual Fund Purchases
People should be wary of buying mutual funds at this time of year if they will be held in a taxable account. “It’s an active time of the year for capital gains distributions,” says Andy Subkoviak, director of global portfolio management for investment advisory firm Parametric in Seattle.
You could get hit with a bill for year-end dividends even if you just purchased shares, and, essentially, you’ll be paying taxes on a profit you didn’t actually see. To avoid paying additional taxes, consult with a broker before making a purchase to find out when distributions are made.
6. Harvest Your Capital Losses
If you own stocks that have lost money, you can sell them to offset realized gains on other stocks. If you have excess losses, you can deduct up to $3,000 from your ordinary income.
Just be careful not to violate the wash-sale rule, which would disallow the deduction. This rule states you cannot purchase the same or a substantially similar stock within 30 days before or after the sale.
7. Pick Up Capital Gains if You’re in a Low Tax Bracket
The end of the year is also a good time for some people to sell stocks that have appreciated significantly in value. This can be a particularly good strategy for those in the 10% and 12% tax brackets since their capital gains tax may be zero. The stocks can then be repurchased, which resets the basis and minimizes the amount of tax to be paid on future gains.
Even if you’re not in the lowest tax brackets, you may want to sell winning stocks to reset the basis if you’re also harvesting losses. Another reason to sell investments at this time of year is to rebalance your portfolio.
[READ : Do You Owe the IRS? How to Find Out]
8. Harvest Losses on Cryptocurrency
A loophole in the law means people who own cryptocurrency should consider harvesting those losses as well. “Right now, the wash sale rule does not apply to cryptocurrencies,” Subkoviak says.
That means investors can sell cryptocurrency for a loss and then immediately buy the same currency without it affecting their ability to deduct the loss. As with other investments, cryptocurrency losses can be used to offset capital gains or regular income taxes.
However, legislation was introduced in July to close this loophole. There have been similar proposals in the past so it is unclear whether this bill will gain traction. But to be safe, it’s in your best interest claim losses now if you can.
9. Meet With Your Tax Advisor
If your tax advisor has time on their schedule, make an appointment to meet with them now before the busy tax season starts in January.
An advisor can help pinpoint end-of-tax-year strategies to reduce taxable income through retirement contributions or itemized deductions. That, in turn, may be key to ensuring households remain eligible for some income-based tax incentives such as student loan interest deductions.
If you don’t regularly meet with a tax professional, running numbers through tax software can be just as beneficial.
More from U.S. News
Answers to 15 Common Tax Questions
Study Shows IRS Audits Black Taxpayers at Much Higher Rate
Tax Prep Checklist: Collect These Forms Before Filing Your Taxes
Year-End Tax Tips for 2023 originally appeared on usnews.com
Update 12/12/23: This story was previously published at an earlier date and has been updated with new information.
