Tax Planning: Making Strategic Moves as December Approaches

Everyone knows that after Labor Day, the months zoom by, and before you know it, December is here, along with the holidays. Most people probably don’t think about it, but in the remaining months of this year, there’s still plenty of time to consider strategic moves to reduce your tax liability before year-end. Once December approaches, your options for meaningful tax reduction begin to diminish. Now would be the ideal time to roll up your sleeves and explore your options.

Here are five strategic moves you can make starting now to rein in your taxes this year:

Watch for Bracket Creep

Most people don’t realize their income is taxed at different rates throughout the year. At the beginning of the year, your income is taxed at the lowest rate (12%). As you receive more income, it is taxed at progressively higher rates—22%, 24%, and 32%. If your earnings have increased over the prior year, you should look to see if it might push you into the next bracket.

For example, if you are a single filer and earned $85,000 in 2022, any income above $41,775 was taxed at the 22% rate. However, if you received a pay increase or bonus that increased your income to $100,000 in 2023, your tax rate increases to 24% on earnings above $95,375.

Knowing that, you could consider a few strategic moves to reduce your adjusted gross income (AGI) and keep you from creeping into the higher tax bracket. Your AGI, which is a function of all your earnings, including interest, dividends, and capital gains, less qualified deductions, determines your tax bracket. Bear in mind that even if avoiding bracket creep is not your concern, reducing your AGI will reduce your tax liability, which is your goal.

Make Additional Contributions to Your Retirement Plan

If you’re eligible to contribute to a qualified retirement plan, such as a 401(k) or IRA, consider making an additional contribution up to the maximum contribution limit. For 401(k) plans, that limit is $22,500 ($30,000 if you are 50 or older). The limit for traditional IRAs is $6,500 ($7,500 if you’re 50 or older). With a traditional IRA, you are able to make contributions as late as April 15 (tax filing deadline) of the following year.

Make a Charitable Contribution

The tax code allows you to make annual tax-deductible cash contributions to qualified charitable organizations up to 60% of your AGI. If you want to beat the year-end deadline for making charitable contributions but don’t have a specific charity in mind, you can set up a donor-advised fund in your name, which will house your donation until you decide. You might even consider accelerating charitable contributions you planned for next year into this year.

Accelerate Deductible Expenses

You can reduce your AGI further this year by accelerating payments of qualified deductible expenses you would normally pay next year into the current year. For example, you could make your January mortgage payment in December and claim it as a current-year deduction. You can do the same with homeowner’s fees, property taxes, and car registration. Work-related expenses, such as dues, legal fees, career education, and licenses, can also be paid in advance.

Tax-Loss Harvesting

In this whipsaw market environment, you will likely approach the year-end with gains and losses. You can harvest capital losses up to $3,000 annually to offset short-term capital gains. You can also use losses to offset your ordinary income. If you have losses above $3,000, they can be carried forward to offset gains or income in future years.

If you still want to own an investment you sold for tax losses because you feel it still has upside potential, you will have to wait 30 days to repurchase it to avoid the IRS wash-sale rule.

Don’t Wait to Plan Your Year-end Tax Moves

To maximize the benefits of any year-end tax moves, you will need time to crunch the numbers, explore your options, and execute your moves. Taking a weekend now to input your numbers into tax preparation software and plan your moves ensures you can take full advantage of the opportunities the tax code allows.

It also allows you plenty of time to schedule a meeting with your tax professional, who can help you consider your options while keeping you in compliance with the tax code. If you wait until December, your tax professional may be unavailable, and you’ll have less time to move your money around.