Allworth co-founder Scott Hanson shares a few tax tips to keep in mind as we head into the last months of the year.
Holidays. Virtually every spectator sport. Halloween. Family gatherings and parties. Insulating your house against the coming wintry weather.
Fall is a busy time of year.
But while fall can be hectic, do not make the mistake of neglecting to embrace the last two months of 2023 as an opportunity to save as much as possible on this year’s taxes.
With just under 60 days left in the year, here are 3 things you can do now to lower your 2023 tax burden.
1. Ask your advisor about tax loss harvesting
While “tax-loss harvesting” is certainly a peculiar phrase, rest assured, it has nothing to do with farming, and it is anything but a shady tax-related shell game.
Tax-loss harvesting is an IRS approved strategy to reduce your taxable income. And here are some basics about how it works.
You sell an investment at a loss (especially if you are likely to take a loss on that same investment by the end of the year) so that you can offset taxes you will owe on this year’s personal income, or from capital gains on another investment. (These can include investments such as stocks, bonds, and ETFs.)
Now, let me emphasize that tax-loss harvesting is technically tax deferral, and not cancellation, but that for many people it can still be a terrific approach that will save money.
Just a reminder: While for many people it can indeed be a beneficial tax strategy, it is extremely complicated. So, speak to your fiduciary advisor so they can provide expertise on whether this approach is a viable one for you.
2. Max out your retirement accounts
Traditional IRAs and 401(k)s are popular for a reason: Both are excellent retirement savings vehicles and can lower your tax burden while helping you prepare for the future.
So, have you “maxed out” this year’s contributions? Because if you haven’t, there’s still time to both sock money away and lower your taxable income for 2023.
For 2023, the traditional IRA contribution limits are:
Or, $7,500 if you are age 50 or older
For 401(k)s, the 2023 personal contribution limits are:
Or, $30,000 if you are age 50 or older
Now, a few things to consider: The above IRA contribution limits are for a traditional IRA. Roth IRAs currently have the same contribution limits as traditional IRAs, with the key differences being that Roth IRA contributions come after tax, and that means that future withdrawals (so long as you are age 59½ and have owned the account for at least five years) will also be tax free.
Lastly, the above 401(k) contribution limits do not include employer contributions. The combined maximum that you and your employer can contribute to your 401(k) for 2023 is $66,000.
3. Discuss your filing status with your advisor and your accountant
Most people take a “set it and forget it” approach to their tax-filing status, but that can be a costly mistake.
Remember, when it comes to lowering your tax burden, your filing status is not something to be taken for granted.
That’s because the pros and cons of the tax implications of the various filing status categories can be substantial.
For instance, there are money-saving scenarios where folks who are married should, in fact, file separately.
While the various filing status considerations are too numerous to list here, I encourage you to speak with your advisor and your accountant to make certain that your status is the ideal one for your unique situation.
I often compare the need to remain vigilant about our personal tax situation to the necessity of remaining vigilant about our health: Everyone over 50 who is reading this knows all too well the sound of that little voice inside your head that almost never stops reminding you to try and be healthier.
Sometimes we appreciate that little voice, while other times we wish it would just shut up.
And just like your health, the battle to protect and improve your financial outcomes is never ending.
This is just a reminder: Fiduciary advisors are there for a reason. So, do not go it alone and do not wait for tax season to re-evaluate either your financial situation or your filing status.