It’s time to file your taxes again, but before you do so, here’s some advice. Follow these guidelines for end-of-year tax moves (as in, before you send off your return) that can make the process simpler and possibly more affordable.
Why End-of-Year Tax Prep Is Important
The end of the year and start of the New Year can be an ideal time to get your affairs in order for the upcoming tax season, especially when it comes to reducing your tax burden. One way to do that is through what’s known as tax-loss harvesting (you’ll learn more details below).
This and other financial moves can be complicated and may require additional preparation or the assistance of a tax preparer or financial planner, which is why an early start can be important.
It’s also a key moment to make sure that you have all the information you need to file properly. If you are missing tax forms, now’s the time to work on getting them before you get too close to the April 15th filing deadline.
Smart Tax Prep Moves to Make
Ready to learn the details? Here are eight moves to make by the end of the year that could save you time and money when Tax Day rolls around.
1. Look at Tax Code Changes
The Internal Revenue Service’s tax code can and does change regularly. Tax brackets can shift (say, in response to inflation’s impact), meaning you could see lower income taxes. In addition, the standard deduction often rises, meaning your taxable income is reduced. For example, for tax year 2023 (filing in April 2024), the standard deduction for married couples is $29,200, up from $27,700 in the 2023 tax year. For single filers, it will increase from $13,850 in tax year 2023 to $14,600 in 2024.
2. Grab All Available Itemized Deductions
It’s also a great time to review what itemized deductions you may have. Beyond state and local packages, you’ll also want to consider any medical expenses, charitable donations, home mortgage interest, or any losses you may have incurred as the result of a natural disaster or theft.
Keep in mind you can still make charitable donations, IRA contributions, and other contributions before the end of the year to offset your taxes.
3. Review Your Contribution Limits
Some of the contributions you can make include putting money in your health savings account (HSA), 529 college savings account, and your IRA for 2023. You’ll have until April 15, 2024, to make these contributions. Making them earlier in the year can give you more time to grow your money on a tax-deferred basis.
Contributions to a traditional IRA or HSA often can reduce your taxable income, as long as you are eligible to contribute and to take a deduction. And while you can also contribute to a Roth IRA, your contributions are aggregated and can’t exceed the annual limit.
Here are contribution limits for tax year 2023 as well as what to expect for 2024:
- IRAs: $6,500 for tax year 2023 and will rise to $7,000 for 2024. Those over 50 can contribute an additional $1,000 per individual.
- HSAs: Contribution limits are $3,850 in tax year 2023, rising to $4,150 in tax year 2024, for individual coverage. Family coverage is $7,750 in 2023, rising to $8,300 in 2024, with those over 55 eligible to make $1,000 more in catch-up contributions.
- 529s: Contributing to a 529 college savings account for yourself, children or even grandchildren will be limited to $17,000 for individuals ($34,000 per married couple filing jointly) for any number of recipients in 2023. Staying within this range allows you to avoid any gift tax. In tax year 2024, the figure will rise to $18,000 for individuals and $36,000 for married couples filing jointly.
4. Consider Tax-Loss Harvesting
Tax-loss harvesting can be a tool to offset losses in non-retirement accounts. Simply put, tax-loss harvesting allows you to use realized losses to offset any gains. So, if you have investments that are below cost basis, you may want to discuss your situation with your financial planner or tax advisor to see if tax-loss harvesting is a good option.
5. Review Your Savings
Were you able to save some money over the last year but haven’t invested it yet? If it’s just sitting in your savings account, now may be the time to consider some tax-efficient investing.
When deploying a tax-efficient investment strategy, it’s crucial to know how an investment is going to be taxed. Ideally, you’d want more tax-efficient investments in a taxable account.
Conversely, you may want to hold investments that can have a greater tax impact in tax-deferred and tax-exempt accounts, where investments can grow tax-free.
Next, it is helpful to know that some investment types are inherently more tax-efficient than others. That insight can aid you in making the best investment choices for the type of investment account that you have. For example, ETFs’ tax efficiency is considered superior to that of mutual funds because they don’t trigger as many taxable events.
Investors can trade ETFs shares directly, while mutual fund trades require the fund sponsor to act as a middle man, activating a tax liability.
6. Consider a Roth Conversion
You might have a traditional IRA and wonder if you should convert it into a Roth IRA instead for tax purposes. Deciding to convert a traditional IRA to a Roth IRA comes down to a few factors, all of which are personal to each individual investor. This may make it important to weigh the pros and cons carefully. You may want to discuss this kind of year-end tax move with a financial advisor before making a decision.
That said, you must first put money into a traditional IRA account to convert into a Roth IRA. If you don’t already have one, you will need to open one.
An IRA rollover can happen a few ways:
- Via an indirect rollover, where the owner of the account receives a distribution from a traditional IRA and can then contribute it to a Roth IRA within 60 days.
- Via a trustee-to-trustee, or direct rollover, where an account owner tells the financial institution currently holding the traditional IRA assets to transfer an amount directly to the trustee of a new Roth IRA account at a different financial institution.
- Via a same trustee transfer, used when a traditional IRA is housed in the same financial institution of the new Roth IRA. The owner of the account alerts the institution to transfer an amount from the traditional IRA to the Roth IRA.
7. Perform a Financial Checkup
There’s a good chance, over the course of the past year, at least one major aspect of your life has changed, such as a new job, a new family member, or a new home.
If you’ve experienced changes in your life, consider taking some time now to reevaluate your financial goals, as well as your estate planning. For example, owning a home and being responsible for a mortgage can impact your discretionary spending. Similarly, if you recently became a parent or pet owner, you may think about adjusting your finances to prepare for the added expenses.
Using an end-of-year checklist can help you reprioritize and reallocate before tax time arrives.
8. Top up Your 401(k)
The more you contribute to your 401(k) account, the lower your taxable income is in that year. So, if you haven’t yet reached your maximum contribution, now is the perfect time to do so. Here’s some food for thought:
- If you contribute 15% of your income to your 401(k), for instance, you’ll only owe taxes on 85% of income.
- Say your annual income is $50,000. If you contribute 15% of your salary annually, $7,500 will be deposited into your 401(k) account, and you will be taxed on $42,500. That could save you thousands on your taxes.
To max out a 401(k) for tax year 2023, an employee would need to contribute $22,500 in salary deferrals — or $30,000 if they’re over age 50 and playing catch-up. Some investors might think about maxing out their 401(k) as a way of getting the most out of this retirement savings option. Others may want to put the money elsewhere. Again, talking with a financial professional can help you weigh the implications of these end-of-year money moves.
The Takeaway
The end of the year and then the start of tax season are ideal times to get ready to file your return by April 15th. Specifically, it may be in your best interests to find ways to mitigate your tax bill. You might rethink your retirement savings vehicles or try tax-loss harvesting (selling securities at a loss in order to reduce your tax bill), for instance.
As you are thinking about your finances, take a minute to look at your banking partner as well and make sure it’s a good fit for your finances.
This article originally appeared on SoFi.com and was syndicated by MediaFeed.org.
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SoFi members with direct deposit activity can earn 4.60% annual percentage yield (APY) on savings balances (including Vaults) and 0.50% APY on checking balances. Direct Deposit means a deposit to an account holder’s SoFi Checking or Savings account, including payroll, pension, or government payments (e.g., Social Security), made by the account holder’s employer, payroll or benefits provider or government agency (“Direct Deposit”) via the Automated Clearing House (“ACH”) Network during a 30-day Evaluation Period (as defined below). Deposits that are not from an employer or government agency, including but not limited to check deposits, peer-to-peer transfers (e.g., transfers from PayPal, Venmo, etc.), merchant transactions (e.g., transactions from PayPal, Stripe, Square, etc.), and bank ACH funds transfers and wire transfers from external accounts, do not constitute Direct Deposit activity. There is no minimum Direct Deposit amount required to qualify for the stated interest rate.
SoFi members with Qualifying Deposits can earn 4.60% APY on savings balances (including Vaults) and 0.50% APY on checking balances. Qualifying Deposits means one or more deposits that, in the aggregate, are equal to or greater than $5,000 to an account holder’s SoFi Checking and Savings account (“Qualifying Deposits”) during a 30-day Evaluation Period (as defined below). Qualifying Deposits only include those deposits from the following eligible sources: (i) ACH transfers, (ii) inbound wire transfers, (iii) peer-to-peer transfers (i.e., external transfers from PayPal, Venmo, etc. and internal peer-to-peer transfers from a SoFi account belonging to another account holder), (iv) check deposits, (v) instant funding to your SoFi Bank Debit Card, (vi) push payments to your SoFi Bank Debit Card, and (vii) cash deposits. Qualifying Deposits do not include: (i) transfers between an account holder’s Checking account, Savings account, and/or Vaults; (ii) interest payments; (iii) bonuses issued by SoFi Bank or its affiliates; or (iv) credits, reversals, and refunds from SoFi Bank, N.A. (“SoFi Bank”) or from a merchant.
SoFi Bank shall, in its sole discretion, assess each account holder’s Direct Deposit activity and Qualifying Deposits throughout each 30-Day Evaluation Period to determine the applicability of rates and may request additional documentation for verification of eligibility. The 30-Day Evaluation Period refers to the “Start Date” and “End Date” set forth on the APY Details page of your account, which comprises a period of 30 calendar days (the “30-Day Evaluation Period”). You can access the APY Details page at any time by logging into your SoFi account on the SoFi mobile app or SoFi website and selecting either (i) Banking > Savings > Current APY or (ii) Banking > Checking > Current APY. Upon receiving a Direct Deposit or $5,000 in Qualifying Deposits to your account, you will begin earning 4.60% APY on savings balances (including Vaults) and 0.50% on checking balances on or before the following calendar day. You will continue to earn these APYs for (i) the remainder of the current 30-Day Evaluation Period and through the end of the subsequent 30-Day Evaluation Period and (ii) any following 30-day Evaluation Periods during which SoFi Bank determines you to have Direct Deposit activity or $5,000 in Qualifying Deposits without interruption.
SoFi Bank reserves the right to grant a grace period to account holders following a change in Direct Deposit activity or Qualifying Deposits activity before adjusting rates. If SoFi Bank grants you a grace period, the dates for such grace period will be reflected on the APY Details page of your account. If SoFi Bank determines that you did not have Direct Deposit activity or $5,000 in Qualifying Deposits during the current 30-day Evaluation Period and, if applicable, the grace period, then you will begin earning the rates earned by account holders without either Direct Deposit or Qualifying Deposits until you have Direct Deposit activity or $5,000 in Qualifying Deposits in a subsequent 30-Day Evaluation Period. For the avoidance of doubt, an account holder with both Direct Deposit activity and Qualifying Deposits will earn the rates earned by account holders with Direct Deposit.
Members without either Direct Deposit activity or Qualifying Deposits, as determined by SoFi Bank, during a 30-Day Evaluation Period and, if applicable, the grace period, will earn 1.20% APY on savings balances (including Vaults) and 0.50% APY on checking balances.
Interest rates are variable and subject to change at any time. These rates are current as of 10/24/2023. There is no minimum balance requirement. Additional information can be found at https://www.sofi.com/legal/banking-rate-sheet.
Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.
Tax Information: This article provides general background information only and is not intended to serve as legal or tax advice or as a substitute for legal counsel. You should consult your own attorney and/or tax advisor if you have a question requiring legal or tax advice.
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