Around the end of the year, it can be tempting to treat taxes as January’s problem. No one wants to add tax preparation to their holiday tasks. However, end-of-year tax planning isn’t only a gift to your future self. It may even add a little extra shine to your holidays when you see how much it saves you.
1. Harvesting Capital Losses
Many favorite holiday traditions make the best of a less-than-ideal situation, and your year-end tax strategy can do the same. Underperforming assets that you sold during the year can offset capital gains for other investments or income, and if you have yet to bring in the harvest, now is the time to do so.
Each year, an individual taxpayer can write off up to $3,000 in net losses by harvesting capital losses. Don’t worry if your losses exceed $3,000, though; you can carry those additional losses forward and write them off next year. And if you need a second opinion after seeing red this year in your portfolio, give our partners at BLW a call.
2. Maximizing Retirement Contributions
It’s advisable for most people to take advantage of their full retirement account contribution limits each year. Of course, you should still follow the advice of your KPN-certified public accountant (CPA) or other financial advisor first, as they know the details of your specific situation.
Regardless, contributing up to your full limit to a 401(k) or IRA will most likely be your best option. In addition to having as much as possible set aside for retirement, these contributions also lower your current taxable income.
The annual contribution limits for 2023 are:
- $22,500 for 401(k)s
- $6,500 for IRAs (plus an additional $1,000 if you are age 50 or older)
These limits can change each tax year. For example, limits for both 401(k)s and IRAs will go up another $500 in 2024. Staying up-to-date on these limits will ensure you maximize this benefit.
3. Take Advantage of Tax Credits and Deductions
Every year, you’ll see comics online or in newspapers showing someone tearfully hugging their kids while a pile of tax forms sits in the background. Deductions for dependents, business expenses, and educational costs can quickly add up and significantly impact an individual’s tax bill.
You likely know you can write off a home office for your business, but do you know how to calculate the home office write-off as a remote worker? Do you know whether you can get the Qualified Business Income Deduction for your side gig? What is an “S Corporation” anyway, and what does the “S” stand for? Strategic? Shareholder? Savvy?
Claiming the right deductions and credits can significantly lower your tax bill. Conversely, messing them up can lead to unpaid taxes, interest, and penalties. Experienced financial advisors, like KPN and our affiliated company, BLW Wealth Management, can navigate your unique end-of-year taxes to ensure you get the deductions and credits you’re entitled to.