Tax planning should be a year-long event, but it often only receives attention at the of the year.
One of the most overlooked aspects of financial planning is tax-minimization, but it is critically important. After all, it’s not how much you make, but how much you keep that matters.
One easy way to save on your state income taxes as a resident of Indiana is to make a contribution to a CollegeChoice 529 account. This is a great way to save for college and it got even better in 2023. You will receive a tax credit for 20% of what you contribute up to a maximum of $1,500. Because this is a tax credit, not a deduction, if you put $7,500 in the Indiana plan you will reduce your taxes by $1,500. Even if you can’t contribute $7,500, whatever you contribute will directly reduce the amount of state income tax you owe.
Your taxable investment portfolio is sometimes a source of potential tax savings. If you have a stock that is down in value, you can sell it to offset any capital gains you have in the year. If the loss exceeds your gains, you can deduct up to $3,000 against ordinary income and the any unused loss carries forward to the next year. If the stock that you sell for the loss is one that you still want to own, you can buy it back 31 days after you sold it and still make full use of the loss.
When interest rates increase, the value of the bonds in your portfolio will usually decline. You can take advantage of this by doing a bond swap. To do this, you sell your bond at a loss, and buy another similar bond. This allows you to deduct the loss, but still puts you in a position to receive bond income and the gains if and when bonds recover as interest rates decline. Be very wary of making mutual fund purchases in taxable accounts near the end of the year. Often, funds will make capital gains distributions in the fourth quarter, and you will receive this taxable income if you have owned the fund for one day.
If 2023 has been a particularly high-income year for you, it might make sense to defer some of your income. This is difficult to do if you are an employee who receives a salary. However, if you are entitled to a bonus near the end of the year, you might ask your employer to pay it to you after the first of the year. If you are self-employed or a business owner, you might consider deferring income until 2024. If you are taking distributions from a retirement account on a monthly basis, you could skip your December withdrawal, use your credit card for purchases, and take an extra distribution in January to pay off your card. Of course, all the deferral of income strategies only help if you expect to have less taxable income next year.
Another way to reduce your taxable income is to maximize your contributions to your retirement plans. In 2023, you can put $22,500 into a 401k or similar plan and can add an additional $6500 if you are over 50. The limit for IRA contributions is $6,500 plus $1,000 more if you are over 50. These retirement plans are convenient places to put your year-end bonus if you want to shelter it from taxes. Remember, you can make IRA contributions for 2023 all the way up to April 15, 2024.
Finally, you can avoid paying taxes on your money by giving it away. The end of the year is a great time to make charitable contributions. You can make your gift in cash, or maybe clean out your attic or garage and donate unused items. Just make sure you get a receipt from the charity.
Another great way to make contributions to a charity is to give them appreciated securities. If you have a stock that has gone way up in value, you will owe capital gains taxes when you sell it. If you give it to a charity, you will be able to deduct the full value of the security that you gift, and the charity will be able to sell it and use the proceeds.
Another strategy for charitable giving is to give your Required Minimum Distribution (RMD) from your IRA or 401k directly to a charity. By doing so, you will satisfy your RMD requirement and avoid paying taxes on the distribution.
Tax planning and minimization should be an on-going process. Even so, as the end of the year approaches, these opportunities can help to lessen your tax burden.
To hear the podcast of the Smart Money Management radio show on this topic, or others, go to our website at alderferbergen.com.
Alderfer Bergen & Co. and LPL Financial do not provide tax, legal or accounting advice. This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, tax, legal or accounting advice. You should consult your own tax, legal and accounting advisors before engaging in any transaction.
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