Year-End Tax Strategies: Leveraging Opportunities Before December 31

Alina Myakota |

Whether you're on the high of a successful financial year, bouncing back from setbacks, or steadily finding your financial groove, making a few savvy moves before December 31 can lay the groundwork for significant tax advantages.

1. Postponing Income

Delaying income is a strategic way to defer taxes. Employees might find it a bit challenging, but if your company commonly pays year-end bonuses in the following year, consider holding off on them. For freelancers, postponing billings until late December can shift income into the next year.

2. Expediting Deductions

Leverage last-minute deductions to maximize your current tax benefits. Charitable contributions are a prime example, offering deductions. Timing your contributions strategically, such as paying an estimated state income tax or an early property tax bill, can significantly boost these deductions.

3. Awareness of the Alternative Minimum Tax (AMT)

Accelerating tax deductions under the alternative minimum tax (AMT) requires caution. Certain expenses deductible under standard rules might not apply under the AMT, such as state and local income taxes and property taxes. If you anticipate falling under the AMT in 2023, avoid prepaying installments due in January 2024.

4. Capitalizing on Losses

Embrace loss harvesting, a year-end strategy involving selling investments to realize losses. These losses can offset any taxable gains, providing a beneficial tax deduction.

5. Maximizing Retirement Contributions

Consider contributing the maximum to your retirement accounts. Tax-deferred retirement accounts can be highly advantageous. Making deductible contributions reduces your taxable income for the year.

6. Understanding Kiddie Tax and IRA Distributions

Stay aware of the implications of the "kiddie tax" for children's investment income. Keep updated on IRA distributions and penalties to avoid unforeseen tax liabilities.

7. Managing IRA Distributions

Regular minimum distributions from traditional IRAs are required after a certain age. Failing to withdraw enough can lead to IRS penalties. Properly managing your withdrawals can help you steer clear of unnecessary tax-related stress.

8. Flex Spending Accounts

Check if your employer offers a grace period for spending flexible account funds. This extension could allow spending on child care or medical bills until March 15, 2024.

By considering and executing these strategies before the year ends, you can potentially secure substantial tax benefits and financial opportunities, paving the way for a more resilient financial future.