Top Ten Year-End Tax Planning Checklist

Tax | Matthew D. Iandolo | Ladidas Lumpkins | Dec 11, 2023

As the year draws to a close, taking proactive steps in your financial planning can significantly impact your tax liability. This checklist provides a guide to key strategies that individuals can consider before the end of the year to potentially decrease their income tax. By strategically managing income, deductions, and investments, you can optimize your tax situation and position yourself for a more tax-efficient financial future.

1. Review Withholdings and Estimated Taxes

For those who receive a W-2, ensure your withholding allowances on Form W-4 align with your current situation and adjust if necessary. This safeguards that you are not overpaying or underpaying taxes throughout the year. For those with additional income sources, consider making estimated tax payments to avoid penalties and interest. The final federal estimated tax payment is usually due January 15 of the following year. Since January 15, 2024, falls on Martin Luther King Jr. Day, the due date for 2023 is moved to January 16, 2024.

2. Review Income, Deductions and Your Tax Bracket

Assess your income sources and deductions to determine your taxable income. Knowing your tax bracket can help in determining whether deferring income or accelerating deductions could benefit your tax situation.

3. Contribute to Retirement Accounts

Consider maximizing contributions to tax-advantaged retirement accounts like 401(k)s or IRAs. These contributions may lower your taxable income. Be mindful of due date as some plans require contributions by December 31 to capture the tax deduction.

4. Harvest Investment Losses

Sell investments with losses to offset capital gains. Capital losses can be used to reduce your taxable income. Individuals can deduct up to $3,000 of net capital losses against ordinary income each year. Any excess losses can be carried forward to future years.

Note also that currently, there is no cryptocurrency wash sale rule, which would otherwise prevent an investor from selling a security at a loss, and subsequently buying the same security within 30 days before or after the sale. That is because the IRS currently treats cryptocurrency as property, and not as a security. Therefore, an investor can harvest crypto losses multiple times in a year, and not have to wait 30 days to repurchase the same or substantially identical cryptocurrencies. The regulatory landscape for cryptocurrencies is dynamic. And Congress has proposed legislation that would subject cryptocurrencies to the wash sale rule. So, it is important to keep abreast of the latest regulatory developments.

5. Charitable Contributions

Make charitable donations before year-end to qualify for deductions. If you have appreciated assets such as stocks, bonds, mutual funds, or digital assets – such as cryptocurrencies – consider donating them instead of selling them. That way you can enjoy a double benefit: avoidance of capital gains taxes on the appreciated value of the security or digital asset and the ability to claim a charitable deduction for the full fair market value of the asset. For meeting IRS requirements for charitable contributions, remember that it is essential to keep proper records of donations and adequate substantiation. For example, a qualified appraisal is required for donations of cryptocurrency for more than $5,000.

6. Health Savings Account (HSA) Contributions

A Health Savings Account (HSA) is a type of personal savings account you can set up to pay certain health care costs. An HSA allows you to put money away and withdraw it tax free, if you use it for qualified medical expenses, like deductibles, copayments, coinsurance, and more. If eligible, contribute to your HSA before the deadline. HSA contributions are income tax-deductible.

7. Education-Related Deductions and Credits

Take advantage of education-related tax benefits, such as the American Opportunity Credit or Lifetime Learning Credit, by paying eligible expenses before year-end.

Additionally, 529 plans offer significant tax-advantages for families to save for future education costs. These plans are usually sponsored by states. Many states provide an income tax deduction on the state income tax return up to a certain.

The deadline for funding a 529 plan to qualify for a state tax deduction varies by state, although many states have a December 31 deadline. Check your state’s specific rules and deadlines to ensure you contribute in time to receive any available deduction.

8. Review Flexible Spending Accounts (FSAs)

Spend remaining funds in your FSA before they expire by the end of the plan year, usually December 31. Due to recent changes in the tax law, your employer may offer a grace period or carryover option for unused FSA funds.

9. Maximize Business Expenses

If you are a business owner, consider making business-related purchases and expenses before year-end to reduce taxable income. Limitations based on income or other factors may apply, so investigate before spending.

10. Gifts and Inheritance Planning

Consider strategies to minimize potential estate taxes, such as utilizing the annual gift tax exclusion. Also keep in mind that payments made directly to educational or medical institutions for someone else’s tuition or medical expenses are not subject to the gift tax.

Individual circumstances vary. At Prager Metis, we provide personalized advice tailored to your specific needs. If you have questions or are looking to schedule a consultation, we are here to help. Contact us today for expert guidance and personalized assistance. Your success is our priority, and we are ready to support you every step of the way.

Matt Iandolo

Ladidas Lumpkins