End of the Year Tax Moves to Reduce Your Taxable Income
Litchfield, NH Resident Looks to Reduce Her Tax Burden
Maximizing 401(k) contributions, charitable donations, and selling underperforming investments are all ways to reduce your taxable income before the end of the year. Another option is to put money aside in a health savings account (HSA) or traditional IRA. You have until December 31st to make these moves, reducing your taxable income for the calendar year.
A Litchfield resident had sold some stock during the year for a large profit. As the end of the year was nearing, she was concerned about being hit with a large tax bill because of these capital gains. She contacted the team at Merrimack Tax Associates for advice.
Maximize Contributions in Retirement Accounts
The money in qualified retirement savings accounts is tax deferred, meaning that you will likely pay a lower rate on the income in retirement than you will if paying taxes on this money now. The maximum contributions for a 401(k) in 2023 is $22,000, or $30,000 for those age 50 or older. You can get similar tax benefits through contributions in a Roth 401(k), with maximum contributions set at $22,500 and $30,000 for those age 50 and up. Making contributions to these retirement accounts will allow you to defer paying tax on the income. Instead, taxes will be paid when the money is withdrawn upon retirement.
Reducing Capital Gains Taxes by Offsetting Them with Losses
The best way to offset capital gains tax incurred during the calendar year is by selling some of your under-performing investments at a loss. The loss from these investments will reduce some of the capital gains tax that you will owe. For investments that are short-term capital gains, taxed at a much higher rate, having these losses to reduce some of this tax owed can make a big difference.
The Litchfield resident was pleased to hear these tax strategies for making her yearly tax bill less burdensome. She has made a large contribution to her retirement savings and plans to sell some of her investments, with the loss reducing her capital gains tax for the year.