Employ These 8 Year-End Strategies To Save During Tax Season

The holiday season is rapidly approaching, which means that the end of the year is just around the corner. The clock is ticking for taxpayers who wish to minimize the taxes they will owe in the spring. As inflation rates reach 40-year highs, Americans are looking for more ways to save where they can. Whether you’ve had a fruitful financial year or are still rebounding from the impact of higher inflation, these eight-year-end tax-saving strategies can help lower your taxes and increase your savings:

  • Make 401(k) and HSA or FSA contributions: Less taxable income means less tax overall. The IRS does not tax what you divert directly from your paycheck into your retirement or health savings accounts. However, there are limits on the amounts you can contribute. In 2022, the limit for a 401(k) plan is $20,500 or $27,000 if you are age 50 or above. The limit for flexible spending accounts is $2,850 in 2022, but be mindful of your policy. Some accounts require the funds to be used before the calendar year ends. An HSA has a limit of $3,650 for individuals or $7,300 for families in 2022, with a $1,000 catch-up for those over the age of 55.
  • Convert money from a traditional IRA to a Roth IRA: Roth conversions can be used to move assets from tax-deferred accounts to avoid higher tax brackets and Medicare premiums during retirement years. A Roth conversion will lower the Required Minimum Distributions (RMDs) from tax-deferred accounts. For joint filers, partial Roth conversions while both partners are still alive may limit the effect of higher marginal tax rates and increased Medicare premiums from higher RMDs on tax-deferred accounts throughout retirement.

    If a spouse dies, the first year after death the living spouse will face tax brackets for singles, which will be higher. Considering a Roth conversion as a strategy to lower future RMDs and decrease taxes on distributions in future years may allow the living spouse to remain in a lower tax bracket. It may also reduce or eliminate Medicare surcharge taxes throughout their retirement years. Watch to Learn More About Using Roth Conversion to Lower Taxes and Medicare Premiums

  • Contribute to a 529 plan: These plans, formally known as qualified tuition programs, are tax-advantaged savings plans for education costs as defined by Section 529 of the Internal Revenue Code. These plans are available in two types: prepaid tuition and education savings plans. Prepaid tuition plans allow an account holder (usually parents and grandparents) to purchase credits at current prices from participating colleges and universities (typically public and in-state) for a beneficiary to use for future tuition and fees.

    The second plan type is an education savings plan. This plan works much like a Roth 401(k) or Roth IRA by investing your after-tax contributions in mutual funds or similar investments. This plan allows an account holder to open an investment account for a beneficiary’s future qualified higher education expenses. These qualified education expenses include tuition, fees as well as room and board. They allow the beneficiaries to use the funds at any college or university, some non-U.S. colleges and universities, and select apprenticeship and vocational programs.

Watch to Learn More About 529 Plans

  • Harvest gains and rebalance your portfolio: Investors can get hooked on market upswings and think their investments will continue rising. This can create a false sense of overconfidence in the market direction, resulting in emotional decisions and delaying selling to capture some of their gains. When looking at the S&P 500 Sector Performance chart, you can see that sectors never consistently go up and stay up, or alternately, down.

    The question remains: how long a sector will stay up or down? The answer is we don’t know. Therefore, the discipline of harvesting gains and rebalancing becomes very important in portfolios. Studies have shown that rebalancing can add up to 1% annually in returns.Watch to Learn More About the Art of Harvesting Gains and Rebalancing

  • Maintain a file with your medical expenses: If you have incurred a hospital stay or other costly medical or dental care, keep your receipts. Generally, you can deduct qualified medical expenses that are more than 7.5% of your adjusted gross income for that tax year. This could include payments for the diagnosis, cure, mitigation, treatment or prevention of disease as well as treatments affecting any body function.

  • Tweak your W-4: The employee’s withholding certificate, also known as W-4, is an IRS form that tells employers how much tax to withhold from each paycheck. If you have received a large tax bill in the past, you could choose to raise your withholding, so you would owe less when tax time comes. On the other hand, if you have received a large refund, you could do the opposite and reduce your withholding so that you would see that money reflected in your paychecks throughout the year. Remember that you have the option to change your W-4 at any time.

  • Donate cash to a charity: According to the IRS, you may deduct charitable contributions of money or property made to qualifying organizations if you itemize your deductions. Generally, you can deduct up to 50% of your adjusted gross income, but 20-30% limitations may apply in some cases.

  • Meet with a Fortune Financial Advisor: November is an excellent time to meet with your financial advisor. They can help pinpoint any other strategies to help you reduce taxable income through retirement contributions or itemized deductions. Once you have made your final tax moves before the end of the year, you can go into the following year with fewer worries about taxes. At Fortune Financial, we help develop financial plans that are tailored to your goals, including retirement planning, healthcare costs, social security planning, company stock benefits, education funding, finding lost or unclaimed 401(k) plans and aging parent issues

Looking Ahead to the 2023 Tax Year

To help offset inflation, the Internal Revenue Service (IRS) releases annual adjustments for the tax season. By adjusting income thresholds each year, the IRS acknowledges that the economic landscape is changing and that salaries may not carry the same purchasing power they once did. For the 2023 tax year, there are adjustments for more than 60 tax provisions, including the tax rate schedules. Here are some important changes to note:

Standard Deductions

  • The standard deduction for married couples filing jointly for the tax year 2023 rises to $27,700, up $1,800 from the prior year. 
  • For single taxpayers and married individuals filing separately, the standard deduction rises to $13,850 for 2023, up $900.
  • For heads of households, the standard deduction will be $20,800 for the tax year 2023, up $1,400 from the amount for the tax year 2022.

Marginal Rates

  • 37% for individual single taxpayers with incomes greater than $578,125 ($693,750 for married couples filing jointly)
  • 35% for incomes over $231,250 ($462,500 for married couples filing jointly)
  • 32% for incomes over $182,100 ($364,200 for married couples filing jointly)
  • 24% for incomes over $95,375 ($190,750 for married couples filing jointly)
  • 22% for incomes over $44,725 ($89,450 for married couples filing jointly)
  • 12% for incomes over $11,000 ($22,000 for married couples filing jointly)
  • 10% for incomes of single individuals with incomes of $11,000 or less ($22,000 for married couples filing jointly)

Other Important Changes

  • The annual exclusion for gifts increases to $17,000 for the calendar year 2023, up from $16,000 for the calendar year 2022.
  • The tax year 2023 maximum Earned Income Tax Credit amount is $7,430 for qualifying taxpayers who have three or more qualifying children, up from $6,935 for the tax year 2022.

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Important Note

This material is provided for educational purposes only and does not constitute investment advice. The information contained herein is based on current tax laws, which may change in the future. Fortune Financial Advisors cannot be held responsible for any direct or incidental loss resulting from applying any of the information provided in this publication or from any other source mentioned. The information provided in these materials does not constitute any legal, tax or accounting advice. Please consult with a qualified professional for this type of advice. The information provided above is obtained from publicly available sources and is reliable. However, no representation or warranty is made as to its accuracy or completeness.