published 2023-11-16 13:00:00 2023-12-07 09:00:00 7 Last-Minute Tax Tips to Save Money This Year /content/thumbnails/p-65-last-minute-tax-tips-1-small.webp last-minute-tax-tips Tax season often sneaks up on us, with many of us only beginning to think about taxes when deadlines loom. It's understandable - taxes aren't exactly a favorite topic for most. However, addressing tax matters ahead of time can be significantly beneficial.

Last-Minute Tax Tips to Save Money This Year

Tax season often sneaks up on us, with many of us only beginning to think about taxes when deadlines loom. It's understandable - taxes aren't exactly a favorite topic for most. However, addressing tax matters ahead of time can be significantly beneficial. In this article, we're highlighting crucial last-minute tax tips that could lead to substantial savings this year. Consider this a timely nudge to get ahead and potentially keep more money in your pocket.

Last-Minute Tax Tips to Save Money This Year

Contribute to Tax-Advantaged Accounts

Tax Deferred Retirement Accounts

Putting money into tax-advantaged accounts is an effective strategy to make your money work for you in the market, rather than handing it over to the government. This approach not only maximizes your investments' growth potential but may reduce your overall tax liability.

You won't owe taxes on the pre-tax income contributed to tax-deferred accounts, or you can claim deductions on your tax return for contributions made with after-tax dollars. If you anticipate being in a lower tax bracket upon retirement than you are currently, deferring taxes now can result in owing less to the IRS, compared to paying taxes while in a higher bracket.

Keep in mind that you can contribute to an IRA for the current tax year up until the filing deadline of April 18 of the following year, however, for 401(k) and 403(b) plans, you need to make your final contributions for the year by December 31.

Put Your Money Into a Health Savings Account (HSA)

Reducing your taxes can be as simple as contributing to a Health Savings Account (HSA). If you have a high-deductible health plan, you may be able to set aside tax-free money for healthcare expenses. The key benefit of an HSA is its tax efficiency - funds used from this account for qualified medical expenses are not taxed, effectively allowing you to pay for healthcare with pre-tax dollars.

And there's more to an HSA's benefits. You can invest your HSA funds and any capital gains or interest are also tax-free. This means you're not only saving on taxes in the present, but also potentially increasing your savings for future healthcare expenses without incurring additional taxes. With some planning, an HSA can be strategized as a long-term investment, complementing your retirement plan and providing a tax-efficient approach to funding future healthcare needs.

Learn more: Health Savings Account (HSA): Become Financially Healthier

Lower Your Tax Bill by Contributing to Tax-advantaged Accounts

Deduct Investment Losses from Your Tax Bill

You may be able to use capital losses to offset capital gains. Or you can offset ordinary income up to $3,000 per year if you don't have any capital gains or your losses exceed your gains. Additionally, you can carry forward losses to future tax years.

The strategy, known as tax-loss harvesting, can also be intentionally used to sell investments at a loss to offset capital gains with capital losses during a taxable year. This approach helps reduce your tax bill, as you are taxed only on your net capital gains - the total gains minus any losses. Implementing tax-loss harvesting takes effort, but it's worth considering if you anticipate realizing gains. For example, when rebalancing your portfolio, you might opt to sell off investments that have decreased in value since you bought them, offsetting any gains you've accrued.

Before you proceed, learn more about tax-loss harvesting, as there are restrictions on what you can or cannot do, and consult with a tax advisor. For example, selling an investment at a loss and immediately repurchasing it, known as a "wash sale", and still claiming the loss is not allowed, and you may get into trouble with the IRS.

Explore if a Roth IRA Conversion is Right for You

A Roth conversion involves transferring some or all of the funds from your traditional IRA into a Roth IRA. Withdrawals from a traditional IRA are taxable, including the earnings and any contributions you initially deducted from your taxes. Additionally, you are required to start taking Required Minimum Distributions (RMDs) at a certain age, regardless of whether you need the funds. In contrast, a Roth IRA offers tax-free withdrawals (provided you meet all requirements) and imposes no mandatory withdrawal rules.

However, there are important considerations to keep in mind. Converting to a Roth IRA involves strict rules, and you will owe taxes on the money you convert. It's crucial to evaluate your current tax rate versus your expected future rate, the tax bill incurred from the conversion, and your long-term estate planning goals before making this decision. Also, remember that a Roth conversion is permanent - once done, you cannot revert the funds to a traditional IRA.

Determine If Itemization Works in Your Favor

When filing your taxes, you receive a standard deduction, a fixed amount that varies based on your filing status (single, married filing separately or jointly, head of household, or qualifying surviving spouse). However, it's worth exploring whether itemizing deductions could be more beneficial for you. If the total of your allowable itemized deductions exceeds your standard deduction, itemizing could lead to tax savings.

For instance, you might benefit from itemizing if the sum of your mortgage interest, mortgage insurance, real estate taxes, or your state and local taxes exceed the standard deduction. Similarly, if your out-of-pocket medical expenses exceed 7.5% of your adjusted gross income - you may be able to deduct the amount above that threshold.

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References

  1. Topic No. 501, Should I Itemize, www.irs.gov/taxtopics/tc501

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