Fund retirement accounts. Give to charity. Harvest losses. Get energy efficient. Here are some strategies to shrink your taxes for 2023–and beyond.
By Kelly Phillips Erb, Forbes Staff
With only a couple of weeks until the end of the tax year, your options for making a big dent in your 2023 tax bill are limited. But there are still some smart moves that can shrink your tax bill for this and future years.
Fund Your Nest Egg
Funding retirement accounts can help defer taxable income and grow your nest egg. Fortunately, in most cases, you have a little breathing room here since deadlines for some accounts are extended until Tax Day.
While you get the biggest bang for your buck by socking away as much as possible—the maximum is $22,500 for 2023—into your 401(k), 403(b), 457(b), or Thrift Savings Plan, don't shy away from making contributions if you're feeling a little less flush. Contribute as much as you can comfortably spare—and pay attention to company matches. Many employers will match your contribution amount up to a portion of your salary, so try to hit those numbers to take advantage of the free cash.
And if you're seeing a few gray hairs now, it may be time to up your contributions to your retirement plans. Individuals over age 50 have a higher max—an extra $7,500 in "catch-up contributions" will bring your limit to $30,000 for the year.
It's important to note that these limits do not affect what you can put into an individual retirement account (IRA) each year. If you have the cash to spare, you can save money in both a 401(k) and an IRA.
You have to act by Dec. 31 to make employee contributions to a 401(k) for 2023, although if you are self-employed and have a “solo” 401(k), you have until the due date for your 2023 return (including extensions) to fund the employer part of the account.
What if you don’t work for yourself? You can get some breathing room for 2023 retirement savings by funding an IRA—the deadline to contribute to an IRA for the 2023 tax year is not until Tax Day, Apr. 15, 2024. The amounts are typically more meager—up to $6,500 in a traditional IRA (if you're over age 50, the limit is $7,500)—but your employer doesn't have to offer a plan for you to reap the benefit. You can open a traditional IRA on your own at almost any financial institution. (Note that if you want to deduct that contribution or make it into a Roth IRA, there are some income limits; read about them here.)
Most retirement plans, including traditional IRAs, require you to have earned income during the year. But if you don't work (and your spouse does), you're still in luck: consider a spousal IRA. A spousal IRA is available to married taxpayers who file a joint tax return, and each spouse can contribute up to those maximum amounts.
If you've been too exuberant in your efforts and put too much into your IRA, now is the time to make the fix. You can make a correction without being subject to a tax penalty if you act before the filing deadline, including extensions.
If you qualify, don't forget the saver's credit. It's a nonrefundable credit worth up to $1,000 for single taxpayers and $2,000 for taxpayers married filing jointly for taxpayers who contribute to retirement plans, including a 401(k), traditional or Roth IRA, or 529 ABLE account to support a disabled person. Strict income limits apply; your adjusted gross income, or AGI, must be less than $73,000 in 2023, and you must fund contributions with new money—rollovers won't qualify.
Remember, you're not just saving for your golden years: putting money aside now typically results in tax deferral. That means you won't pay tax on that money now, when you may be in a higher tax bracket. With traditional retirement plans, you pay tax on the funds when you later take distributions. By then, you may be in a lower tax bracket.
Finally, with a growing number of Americans–a record 72 million as of the end of 2022–covered by health savings accounts, there’s another opportunity for saving on 2023 taxes after the new year. This can also help with retirement. If you haven’t yet contributed the maximum to your health savings account, or HSA, for 2023, you have until Tax Day to top up your contributions. The maximum contribution for 2023 is $3,850 for individual and $7,750 for family coverage, with those 55 or older allowed to kick in an extra $1,000 as a catch-up contribution. Not only are these contributions tax deductible, but they also grow tax free and can be withdrawn tax free so long as they’re used for medical expenses (including later on, in retirement).
Harvest Your Losses
Another move to consider? Check your stock portfolio. When it comes to the market, sometimes you win, and sometimes you lose. Owning up to a loss may not feel great, but it can pay off. Selling losing stocks can be beneficial for tax purposes for those taxpayers who have sold winning stocks during the year (just as selling winning stocks can benefit those who have sold losing stocks during the year). Selling stocks or other investments that are losers to offset gains from winners is sometimes called harvesting.
You must first use losses to offset gains of the same kind (short-term gains with short-term losses, long-term gains with long-term losses). But if one type of loss exceeds your gains of the same kind, you may be able to apply the extra to the other. For example, if you realized a long-term loss of $11,000, but just $5,000 in long-term gains, you can use the “extra” $6,000 loss to offset short-term gains.
This trick also works for taxpayers who own mutual funds. Mutual funds allow you to pool your money with other investors—you’re not actively trading stocks or other investments but relying on a professional to do it for you. At certain points during the year, but often in December, a mutual fund will make a capital gains distribution, which represents the fund owner’s share of sales of stock or other assets during the year. Fortunately, senior contributor William Baldwin has some workarounds to reduce the blow—one of them is to harvest your losses in other accounts by selling off losers.
Be careful: If you’ve “lost” money in your portfolio, make sure that it’s an actual loss. Even if your stocks tumbled thousands of dollars in an unpredictable market, it doesn’t mean anything to Uncle Sam unless you realize a taxable event (like a stock sale or other event that triggers a tax consequence). If that’s the case–and you have realized losses–you may want to offset those losses with gains (and vice versa). Remember that there may be other, non-tax reasons for selling winning or losing stocks, but if you’re doing it as a tax strategy, make sure you’re buying or selling stocks that make good tax sense.
And, as Baldwin notes, remember that this advice applies to assets in taxable accounts, like your brokerage. Harvesting any losses you have in a tax-deferred retirement account doesn’t move the needle at all.
Do Something Good
Making charitable contributions allows you to do something good (and get the warm fuzzies) while whittling down your taxable income. It can be especially appealing for taxpayers looking to offset a year with high earnings, including a last-minute bonus.
Some strategies, like writing checks or making contributions by credit card, take very little planning (assuming that you itemize your deductions each year). Just be sure to get your gifts in by year-end—you can still claim the related deduction if the check doesn't clear or you don't pay off the credit card until 2024. If you don’t make the deadline or don’t expect to itemize in 2023, all isn’t lost; consider bunching your donations in 2024 to maximize the tax break.
If you find yourself staring down an inflated portfolio (congrats!), consider donating property that has significantly appreciated, like stock. It can result in a double benefit: not only can you deduct the property's fair market value (so long as you've owned it for at least one year), but you'll avoid paying tax on the gain. Typically, appreciated assets are subject to capital gains tax at disposition, whether by selling or gifting, but there's an exception for donations to charitable organizations.
Taxpayers who know how much they want to donate but aren't ready to pull the trigger on where to donate should consider contributing to a donor-advised fund (DAF). A DAF is sponsored by a public charity and allows donors to make an irrevocable charitable contribution and take an income tax deduction for the donation now and then recommend how to make distributions from the fund over time. This is perfect for year-end if you're not sure what causes you want to support or if you have a lump of appreciated stock you’d like to donate and use for several years worth of giving. Before you dribble it out to charity, the money in your DAF can be invested and grow tax free. Some of the biggest DAF funds are affiliated with financial firms like Fidelity, Schwab and Vanguard, while others are run by local community foundations.
Older taxpayers—at least age 70 1/2—have an even more significant incentive to donate: Qualifying charitable distributions (QCDs) are tax-free, don't count towards your charitable limits, and you won't even have to itemize to see the benefit. With a QCD, you can roll up to $100,000 directly from your IRA to a qualified charity in 2023. If you're at least 73, the QCD can also satisfy your required minimum distributions (RMDs) for the year. While this is a good year-end move, don't wait too late: your donation must be in the charity's hands by Dec. 31, 2023.
Borrow From Family Members
If you want to cut costs at year-end and preserve your existing tax breaks, consider borrowing from family members. Despite Shakespeare's advice to neither a borrower nor a lender be, an intrafamily loan can allow you to reduce the interest rate while preserving any associated tax breaks.
If your parents—or grandparents—have the liquidity to spare, they can loan you money to pay down your student loans or mortgage. Just like with a bank loan, the lender will want to document the loan properly, including the repayment terms and the amount of interest. The interest must be at least as much as the current "applicable federal rate" (AFR)—the minimum fixed interest established by the government each month.
Currently, the AFR is 5.26% a year for loans of three years or less, 4.82% for midterm loans of up to nine years, and 5.03% for longer-term loans such as 15- and 30-year mortgages. Compare that to an average of 7.49% for mortgages and student loan refinance options ranging from 6.99% to 11.99% (new federally guaranteed loans currently range from 5.50% to 8.05%), and you can see that you'll recognize some savings.
The best part? The tax benefits to you remain the same. You can deduct mortgage payments on your taxes, for example, even if you're paying Mom and Dad instead of Wells Fargo.
On the flip side, the interest payments will be taxable to the lender, but at a fixed rate that will likely pay out more than their top-yield CD.
Commit To Being More Energy Efficient
If you're committing to going green in 2024, you can start now. Investing in e-vehicles and greening your home are not only good choices for the environment, but you can reap tax benefits at the state and federal levels, too.
If you buy a new plug-in EV or fuel cell vehicle (FCV) in 2023 or later, you may qualify for a clean vehicle tax credit. Generally, to qualify, you must buy a qualifying EV for your own use, primarily in the U.S. The credit is nonrefundable and subject to income limits—in 2023, your AGI may not exceed $300,000 for married couples filing jointly ($225,000 for heads of household and $150,000 for all other filers). You can use your modified AGI from the year you take delivery or the year before, whichever is less.
The credit can be as much as $7,500, but the amount of the credit changes depending on when you place the vehicle in service. Specifically, qualifying vehicles placed in service after Apr. 18, 2023, must meet new critical mineral and battery component requirements. If the EV meets both criteria, the credit is up to $7,500, but a vehicle that doesn't meet either requirement will not be eligible for any credit. To qualify for the battery portion of the credit, a certain percentage of the vehicle's battery must be assembled or manufactured within North America. Pay attention since those percentages change every year (the same is true of the critical minerals requirement).
Used cars may also qualify for a nonrefundable credit up to a maximum credit of $4,000. As with new EVs, the rules are very specific: The car can’t cost more than $25,000 and the income limits are lower ($150,000 for a married couple, $112,500 for a head of household and $75,000 for a single), but the requirements for domestic manufacturing don’t apply.
State credits may also be available. If your state offers a credit, pay attention to details. Restrictions may apply, including a limitation on your right to claim the maximum credit for state and federal purposes.
One crucial thing to keep in mind: You claim the credit in the tax year that the vehicle is delivered, not the year it is purchased. So, if you bought an EV in 2023, but your delivery is delayed to 2024, you will claim the credit on your 2024 tax return. If you're not sure you can get immediate delivery, it may be smart to wait. Beginning on Jan. 1, 2024, buyers can apply the credit as an immediate discount at the dealer, making your out-of-pocket a better bet.
If you want to make green improvements to your home, you may also qualify for the Energy Efficient Home Improvement Credit or the Residential Clean Energy Credit. These credits typically apply to homeowners, but renters may also be able to claim credits. Some credits also apply to vacation homes, but they are not available to homes not used as residences (like rentals or other business properties).
The Energy Efficient Home Improvement Credit applies to the purchase of energy-efficient items like exterior doors, windows, skylights, insulation materials, central air conditioners, water heaters, furnaces, boilers, and heat pumps. The amount of the credit is a percentage of the total improvement expenses in the year of installation. For 2023, that amount is 30%, up to a maximum of $1,200 (heat pumps, biomass stoves, and boilers have a separate annual credit limit of $2,000). Unfortunately, you can't claim the credits until the year the property is installed. However, there is no lifetime limit, so if you can't get the installation in time now, you can claim the maximum annual credit every year that you make eligible improvements until 2033.
The Residential Clean Energy Credit applies to installing solar, wind, and geothermal power generation, solar water heaters, fuel cells, and battery storage. The amount of the credit you can take is a percentage of the total improvement expenses in the year of installation and is a whopping 30% in 2023. There is no annual maximum or lifetime limit and credits you can’t use in the year you install a system can be carried forward.
One extra bit of information if you opt to go solar: traditional roofing materials and structural components do not usually qualify for the Residential Clean Energy Property Credit. However, some solar roofing tiles and shingles serve as solar electric collectors while also acting as a traditional roof and would still qualify for the credit. If that matters to you, ask before you buy.
More details, including links to the tax forms, are available on the government's official website.
Act Now
While you still have time to act on many of these year-end moves, if you feel like it's too late, don't just sit back until 2024. Consider it an excellent time to start planning for next tax year.
You can find more details about year-end tax moves, including tax harvesting and Roth conversions, in our subscribers-only webinar, available as a recording here.
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