White Rabbit’s song in Alice in Wonderland runs through my mind as I write this blog. “I’m late, I’m late, for a very important date!”
Fantasy aside, the important date we’re talking about here is April 15, 2024. Tax Day.
Since Dec. 31, 2023, is right around the corner, which marks the end of the 2023 tax year, now is the time to explore strategies that may minimize your tax liability and move you closer to your overall financial goals—and freedom.
Let’s get started with these 5 tips.
#1 “DON’T LET THE TAX TAIL WAG THE INVESTMENT DOG”
Ever heard this well-known investment mantra? It’s one worth repeating, especially at the end of the year. Essentially, it means that investors should not let their worries about the taxes they might owe in the short term drive their financial strategy in the long term.
The moral of the story: Shorter-term tax considerations, or the “tail,” should guide, not govern, your overall investment strategies and goals, or the “dog.”
#2 USE TAX-LOSS HARVESTING TO MINIMIZE TAXABLE GAINS AND MANAGE LOSSES
During a downturn in market conditions, such as what we just experienced in 2022, the silver lining can be tax-loss harvesting. Also known as tax-loss selling, this strategy reduces capital gains taxes owed from selling profitable investments.
How it works
Tax-loss harvesting involves selling losing investments before the end of the year to offset any taxable gains you have realized during the year. If losses exceed gains, you can use up to $3,000 of excess loss to wipe out other income. Investors can then replace the asset that was sold at a loss with a comparable asset, but they must make sure to follow certain rules so it’s not considered a wash sale.
What’s a wash sale?
The wash-sale rule says that the tax loss will be disallowed if you buy the same security, a contract or option to buy the security, or a substantially identical security, within 30 days before or after the date of selling the loss-generating investment.
In a wash sale, the IRS will not allow you to write off the investment loss.
NOTE: The IRS also states that it believes a stock sold by one spouse at a loss and purchased within the restricted time period by the other spouse is a wash sale.
#3 GET SOME TLC: USE TAX-LOSS CARRYFORWARDS STRATEGICALLY
Simply put, tax-loss carryforward (TLC) is a strategy to reduce tax liability.
A TLC is a tax rule that allows you to carry forward tax losses from previous years to offset the amount of tax that you would have to pay in subsequent years. You’ll also see this rule referred to as a capital loss carryover.
The length of time that losses can be carried forward will differ depending on the state in which you live. But the general rule is that they can be used for the next seven years or until the balance has been exhausted.
#4 SUPPORT A FAVORITE CHARITY AND MINIMIZE TAXES THROUGH A QCD
A qualified charitable distribution, often better known as a QCD, can be an all-around winning strategy—you get to support the nonprofits you love and reduce your taxable income.
If you are age 70½ and older, you can direct QCDs of up to $100,000 per year from your traditional IRA(s) to operating charities (excluding donor-advised funds).
NEW this year: You also can direct a one-time, $50,000 QCD to a charitable remainder trust or charitable gift annuity.
A QCD can satisfy all or part of the annual required minimum distribution, is not taxable income and does not qualify for a charitable deduction.
NOTE: Married couples who submit joint tax returns each qualify for an annual QCD of up to $100,000, for a potential total of $200,000.
#5 CONTRIBUTE TO IRA/ROTH/401k/RETIREMENT PLANS
Looking to potentially lower your tax bill—or even increase your refund—while funding your retirement? You can put money into an individual retirement account, or IRA, for the previous year up until the federal tax deadline. For 2023, that means you can make IRA contributions (and possibly use them to decrease your taxable income) until April 18, 2024.
However, there are some important income level rules with IRAs. Together, we can review your situation to ensure you’re eligible to make these types of contributions and discuss alternative strategies if you’re ineligible due to a higher income.
Did you know? Roth IRAs are a true gem since the growth on these accounts are tax-deferred and all distributions after the penalty free age of 59 ½ are tax-free.
Does all this information have your head spinning?
That’s why we’re here.
At Alia, our priority is to provide knowledgeable guidance to achieve your financial dreams and goals. This includes smart end-of-year tax-saving strategies. Contact us today.