Want to cut your next income tax bill down to the bone? A little year-end tax planning might just do the trick.
Although your 2023 federal income tax return isn’t due until April 2024, there are several things ordinary Americans can do before the end of the year to generate some additional tax savings. In some cases, the actions you take to lower your taxes can help you financially in other ways, too—like helping you pay medical bills, save for your child’s college, or providing income in your golden years.
So, if you’re one of those people who doesn’t like to pay taxes (that’s everyone, right?), here’s my list of the best year-end tax planning tips. You probably won’t be able to use every tip, but I’m sure there’s at least one or two that can help you save a few bucks at tax time. Dig in now while there’s still time to whittle down next year’s tax bill.
Related: What Tax Bracket Are You In?
Table of Contents
1. Contribute to Your 401(k) Plan
Saving for retirement is always a smart thing to do. But it gets even better when you can also cut your next tax bill at the same time. That’s why putting more money in your traditional 401(k) account, if you have one with your current employer, is a great end-of-the-year move.
With a traditional 401(k) plan, the money that’s taken out of your paycheck and put in your 401(k) account isn’t included in your taxable income. If it isn’t included in your taxable income, then you won’t have to pay tax on that amount for the year the contribution is made.
So, if you contribute more to your 401(k) account before the end of the year, the tax you owe for the 2023 tax year will be lower. You’ll ultimately have to pay tax on that money when you withdraw funds from your 401(k) account, but you’ll be kicking that tax bill down the road and saving money now.
YATI Tip: With a Roth 401(k) account, there’s no tax break when you put money into the account, but you don’t pay tax on withdrawals when you retire.
As an added bonus, you might also qualify for a tax credit of up to $1,000 ($2,000 for married couples filing a joint tax return) for putting money into your 401(k) account. This credit—commonly called the Saver’s Credit—is only available to low- and moderate-income individuals. So, to claim the credit, your adjusted gross income (AGI) must be at or below a certain amount, which is based on your filing status.
Just make sure you don’t go overboard and put too much money in your 401(k) plan during the year. If you want to max out your 401(k) plan in 2023, you can contribute up to $22,500 to your account—up to $30,000 if you’re at least 50 years old by the end of the year. However, if you go over the contribution limit and don’t pull the money back out, the excess amount will be treated as taxable income. So, in the end, you’ll get taxed twice on any contributions over the annual limit—once in the tax year the excess contribution is made, and again when you withdraw it later.
2. Put Money In an IRA
If you don’t have a 401(k) account—or even if you do—squirreling away money in a traditional individual retirement account (IRA) this year can also lower your taxes. Plus, as with contributions to a 401(k), you’ll be building a bigger nest egg for retirement.
Traditional IRAs and traditional 401(k) accounts are similar in other respects. For instance, both are tax-deferred retirement accounts, which means you enjoy a tax break when you put money into the account that “defers” the payment of income tax until money is withdrawn from the account.
With a traditional IRA, the initial tax break comes in the form of a deduction for contributions made during the tax year. This tax deduction will lower your taxable income, which lowers the amount of tax you owe. However, be warned that your IRA deduction might be limited if you or your spouse is covered by a retirement plan at work (e.g., a 401(k) plan).
As with contributions to 401(k) accounts, you might also be able to claim the Saver’s Credit by contributing to an IRA. This, again, can cut your tax bill by up to $1,000 (or $2,000 for joint filers).
IRAs have annual contribution limits, too. For the 2023 tax year, the maximum amount you can put into all your IRAs (including any Roth IRAs) is $6,500 if you’re under age 50, or $7,500 if you’re 50 or older. But, again, don’t go over the limit. If you do, you could end up paying a 6% penalty each year the excess amount remains in your IRA.
YATI Tip: Even though you have until the tax filing deadline for 2023 returns (April 15, 2024, for most people) to put money in an IRA for the 2023 tax year, why wait? The sooner you contribute to an IRA, the sooner you’ll start reaping the benefits of tax-deferred growth with a traditional IRA or tax-free growth with a Roth IRA.
3. Give to Charity
If you expect to claim itemized deductions on your 2023 tax return instead of claiming the standard deduction, you can deduct charitable donations of cash or property made this year. And the more you give, the more you’ll shave off your tax bill.
There are some limitations (e.g., charitable deductions are generally limited to 60% of your AGI), but in most cases you can deduct the full fair market value of gifts to a church, school, or other qualified charitable organization.
While you don’t have to rush out and donate right away, planning the rest of your 2023 charitable contributions now can pay off big time at tax time. For instance, if you don’t normally donate enough each year to justify itemizing, but you expect itemized deductions to be close to the standard deduction for the year, you can consolidate two or more years worth of charitable contributions into one year. With this strategy—known as “bunching”—you can at least deduct those gifts in one year, instead of missing out on the deduction for all years.
YATI Tip: You can also deduct 14¢ per mile if you drive your own car while volunteering for a charitable organization.
You can also set up a donor-advised fund if you don’t think your itemized deductions will quite surpass your standard deduction for the year. With a donor-advised fund, you can make a single contribution to the account in one year, but have the money distributed to selected charities over the course of several years. As with bunching, at least you get to claim a charitable deduction for the one year that the single contribution to the fund is made.
Qualified Charitable Distribution
If you’re at least 70½ years old, you can also make a qualified charitable distribution (QCD) from a traditional IRA and have that money go directly to charity. You can’t claim an itemized deduction for a QCD, but the amount donated isn’t considered taxable income (like other distributions from traditional IRAs). In addition, QCDs count toward any required minimum distributions for the year, so you can keep more money in your tax-advantaged account for a longer period of time.
4. Visit the Doctor
You might expect to see “visit your accountant” on this list, but I’m betting “visit your doctor” probably took you by surprise. But it’s true: Going to your doctor before the end of the year might actually lower your taxes.
If you itemize, you can deduct qualified medical expenses exceeding 7.5% of your AGI for the year. Any medical expenses for which you’re reimbursed by insurance or otherwise don’t count, though.
For example, if your AGI is $100,000, you qualify for an itemized deduction for any unreimbursed medical expenses above $7,500 ($100,000 × 7.5%). Therefore, if you have $10,000 of unreimbursed medical expenses for the year, that results in a $2,500 deduction ($10,000 – $7,500).
So, if you expect to itemize and have some health issues that you’ve been putting off, visiting your doctor before the end of the year could translate into tax savings. It could be something simple, like getting new glasses in 2023 instead of waiting until next year. Or, perhaps, moving an annual physical exam scheduled for January up to December.
If you’re already close to the 7.5% of AGI threshold, an extra doctor visit or two might push you over the limit and allow you to deduct some of your medical expenses. If you’re already over the threshold, then all your extra medical costs will be deductible. And anything you can deduct will lower your tax liability.
Flexible Spending Accounts
If you have a medical flexible spending account with unused funds, visiting the doctor before the end of the year could help you draw down your balance. Remember, flexible spending accounts operate on a “use it or lose it” basis, so any leftover funds will eventually be lost.
5. Open and Fund an HSA
And speaking of medical costs, try opening and funding a health savings account (HSA) if you qualify. These tax-advantaged accounts help you save for and pay qualified medical expenses. Some people even use HSAs to save for retirement.
However, you’re only allowed to contribute to an HSA if all the following are true:
- You’re covered under a high-deductible health plan (HDHP) on the first day of the month.
- You don’t have other health insurance coverage.
- You aren’t enrolled in Medicare.
- You can’t be claimed as a dependent on someone else’s tax return for the year.
So, where are the tax savings with HSAs? First, like traditional IRAs, contributions you make to your own HSA are tax deductible. (If your employer contributes to your HSA, those contributions aren’t taxable, either.) So, by putting money in an HSA by Dec. 31, you can lower your 2023 taxable income, which will lower your overall tax liability.
There are other tax benefits, too. Money in an HSA can grow on a tax-free basis. Plus, distributions from an HSA that are used to cover qualified medical expenses are also tax-free.
However, as with IRAs and 401(k) plans, you have to worry about the HSA contribution limits. For 2023, you can contribute up to $3,850 to an HSA if you have health care coverage under an HDHP for just yourself, and up to $7,750 if you have coverage for your whole family. If you’re at least 55 years old, you can put up to $1,000 more in your account for the year. If you go over the annual limit, the IRS can assess a 6% penalty on the excess amount.
YATI Tip: As with traditional IRAs, you have until the tax filing deadline to contribute to an HSA for the 2023 tax year. But, again, waiting until next year to put money into an HSA just means you’re missing out on the tax-free growth HSAs offer.
Related: Best HSA Providers
6. Sell Depreciated Stock to Generate Tax Losses
Investors often use a strategy known as “tax loss harvesting” to reduce their capital gains tax for the year, but it can also generate a tax deduction that can be used against any type of taxable income. If you haven’t heard of it, read on to see if you can use this tactic to save money, too.
Here’s how it works: If a few of your investments in the stock market are tanking, consider selling some of your depreciated shares before the end of the year to generate a loss. Why? Because those losses can be used to offset gains from the sale of profitable investments, which will lower your capital gains tax.
Plus, if you still have losses left over after offsetting gains, you can deduct up to $3,000 of the remaining losses from your “ordinary” income, such as wages, tips, interest, retirement plan distributions, taxable Social Security benefits, and the like. Anything over the $3,000 limit is carried forward and applied against gains or ordinary income in future years.
Net Investment Income Tax
In addition to paying capital gains taxes on investment profits, higher-income taxpayers might also have to pay a 3.8% surtax on their “net investment income.” Generally, net investment income includes interest, dividends, capital gains, rental and royalty income, and non-qualified annuities. This additional tax is imposed if your modified AGI exceeds a certain amount (e.g., $200,000 for single filers and $250,000 for joint filers).
However, since capital losses can offset capital gains for purposes of the net investment income tax, selling depreciated stock to generate a capital loss can also help reduce this surtax.
Wash Sale Rule
If you sell stock to generate capital losses, watch out if you want to buy back some of the stock you sell. Under the “wash sale rule,” you can’t offset gains or deduct losses from ordinary income if you buy the same or substantially identical stock 30 days before or after the sale.
YATI Tip: The wash sale rule doesn’t currently apply to cryptocurrencies, allowing you to sell and buy back crypto within the 30-day period.
7. Defer Income
Naturally, the less income you have in 2023, the lower your tax bill for the year will be. So, if you can, think about deferring taxable income from this year to next year to lower your 2023 taxes.
So, how can you defer income? Here are a few suggestions:
- If you’re due a year-end bonus, ask your boss to delay payment until 2024.
- If you’re self-employed, wait until 2024 to send year-end invoices to your clients or collect past-due accounts.
- If you’re an investor, wait until 2024 to sell assets that will generate capital gains.
Of course, as with paying tuition early, you might be shooting yourself in the foot for next year’s taxes if you defer too much income. So, make sure this works for you in the long run before shifting income to 2024. For example, if you expect to be in a higher tax bracket for the 2024 tax year, then you might be better off receiving the income this year.
YATI Tip: Delaying the sale of stock and other capital assets can also reduce the capital gains tax rate you end up paying. If you hold an asset for more than one year, any profits from the sale of the asset are generally taxed at a lower capital gains rate than profits from the sale of assets held for one year or less.
8. Prepay Property Taxes
Depending on how your local government bills you for property taxes, you might be able to prepay 2024 property taxes and deduct that amount on your 2023 tax return. However, you can only claim the tax deduction if you itemize, and the deduction for all your state and local taxes is capped at $10,000 per year.
To deduct 2024 property taxes on your 2023 return, the taxes must be assessed and paid before 2024. When your property taxes are assessed depends on state or local law.
As an example, assume your county assesses property tax on July 1, 2023, for the period extending from that date until June 30, 2024. The county also requires payment in two installments. The first installment is due Sept. 30, 2023, and the second installment is due Jan. 31, 2024. Assuming you paid the first installment on time, you can pay the second installment by Dec. 31, 2023, and claim a deduction for this prepayment on your 2023 return because the tax for the first half of 2024 was assessed in 2023.
Just be aware that, if you deduct property taxes for 2024 on your 2023 return, you won’t be able to deduct them again on your 2024 return. So, think twice before trying this tactic. For example, if you think you’ll be in a higher tax bracket in 2024 than you’re in for 2023, you might not want to prepay your property taxes this year since your tax deduction will likely be more valuable to you next year. However, if you expect to be in a lower tax bracket next year, then go ahead and pay the taxes in 2023 if you can.
Also, if your 2023 property taxes are already above the $10,000 limit (or close to it), then don’t prepay your taxes because you won’t be able to deduct the prepaid amount (or all of it) on your 2023 return anyway.
9. Pay Tuition Early
Prepaying bills can help in other ways, too. For example, if you’re putting a child through college or furthering your own education, you might be expecting a tuition bill soon for a semester starting early next year. If you can pay that tuition bill this year, doing so could provide some significant tax benefits for 2023—and you can still claim the standard deduction to get them.
American Opportunity Tax Credit
By paying a tuition bill early, you might be able to claim the American Opportunity tax credit for the education expenses covered by that bill. The credit is worth up to $2,500 per eligible student. Plus, up to 40% of the credit is “refundable,” which means that you can receive a tax refund for the refundable portion even if your pre-credit tax bill is less than the overall credit amount.
The American Opportunity credit has a number of restrictions and limitations, though. So, not everyone can claim this tax benefit. For example, the credit is only allowed if the student hasn’t completed the first four years of postsecondary education before the tax year started, and it’s only available for four tax years per eligible student. The credit is also phased out if your modified AGI is between $80,000 and $90,000 ($160,000 to $180,000 for married couples filing jointly). Other qualifications and restrictions apply, too.
Lifetime Learning Tax Credit
If you can’t claim the American Opportunity credit, then take a look at the Lifetime Learning tax credit (you can’t claim both). This credit is worth up to $2,000 per eligible student, but it isn’t refundable. However, the Lifetime Learning credit is available to many more people than the American Opportunity tax credit.
One of the main reasons why the Lifetime Learning credit is more accessible is because there’s no limit on the number of years you can claim it. You also don’t have to claim the credit in any set number of consecutive years as you do with the American Opportunity credit. In addition, it can be claimed for qualified educational expenses for undergraduate, graduate, or professional degree courses—including courses to acquire or improve job skills. The same phase-out income limits that can wipe out the American Opportunity credit and also reduce the Lifetime Learning credit to zero, though.
YATI Tip: As with prepaying property taxes, think carefully before paying a tuition bill early. While paying your tuition bill early might ease your 2023 tax burden, you won’t be able to claim either tax credit for that tuition payment in 2024. So, for example, if you expect to be in a higher tax bracket next year, then you might want to wait until 2024 to pay the bill.
10. Contribute to a 529 Plan
Before you actually get any tuition bills, you’ll need to save some money to pay them. That’s where 529 plans come into play. These plans are used to save for a designated beneficiary’s educational expenses. The beneficiary is typically a child or grandchild, but you can open a 529 account for anyone—even for yourself.
There are no federal tax breaks when you put money in a 529 plan. However, that money grows tax-free, and there’s no federal income tax when you withdraw funds from your account if the money is used for qualified 529 plan expenses.
So, if there are no federal tax breaks when you put money into a 529 plan, why is contributing to a 529 plan included in this list of year-end tax saving tips? Well, while there are no immediate tax breaks under federal law for stuffing money in a 529 plan, you might get a state tax deduction or credit for doing so.
Most states offer a tax deduction or credit for contributing to a 529 plan. So, while your federal income tax bill might not drop, you might be able to trim your state income tax bill by putting money into a 529 plan. And money saved on your state taxes spends just as well as money saved on your federal taxes.
There might be limitations on your state tax break, though. For instance, you usually have to contribute to the 529 plan set up by your state to qualify for a state tax deduction or credit (although a few states let you put money in any 529 plan). You also might not get a state tax break for the full amount of your contributions to a 529 plan, since some states limit how much qualifies for their tax deduction or credit.
Check with the state tax agency where you live to see if there are any tax breaks for 529 plan contributions in your state.
YATI Tip: What if you stash money in a 529 plan for your child, but he or she doesn’t go to college or otherwise doesn’t need the money you saved? No problem—there are several things you can do with unused 529 plan funds, including transferring the money to a family member’s 529 plan, rolling it over to a Roth IRA, or paying up to $10,000 of student loan debt.