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With roughly one month left in 2023, there’s still time to reduce your tax bill or boost your refund, experts say.
Typically, you can expect a federal refund when you overpay annual taxes or withhold more than the total owed. The average refund for 2023 was $3,054, as of Oct. 27, according to the IRS.
“Start organizing your tax-related documents now,” said certified financial planner Akeiva Ellis, co-founder and financial coach at The Bemused in the Boston area. “Waiting until April can lead to unnecessary stress.”
Here are some tax strategies to consider before the calendar winds down, according to financial experts.
1. Boost pretax 401(k) contributions
This is especially important if you’re not maximizing employer matching funds or if you could benefit from a reduction in taxable income.
Akeiva Ellis
Co-founder and financial coach at The Bemused
“This is especially important if you’re not maximizing employer matching funds or if you could benefit from a reduction in taxable income,” said Ellis.
By adjusting 401(k) plan deferrals now, the change could go into effect before you receive a year-end bonus, which could reduce earnings and pad retirement savings.
2. Consider ‘bunching’ donations
Taxpayers claim either the standard deduction or total itemized deductions, whichever is bigger, and the latter category includes charitable and medical deductions, along with state and local taxes and more.
In 2018, the Tax Cuts and Jobs Act nearly doubled the standard deduction, slashing the number of filers who itemized. For 2023, the standard deduction is $13,850 for single filers and $27,700 for married couples filing jointly.
“Even for our wealthier clients, many of them are no longer itemizing deductions,” said Robert Dietz, national director of tax research at Bernstein Private Wealth Management in Minneapolis.
One solution, “bunching deductions,” aims to accelerate expenses, such as charitable donations, into a single year, aiming to exceed the standard deduction thresholds, Dietz said.
While nonelective medical costs can be difficult to control, bunching charitable donations is common, especially for so-called donor-advised funds, which offer an upfront deduction and act like a charitable checkbook for future gifts.
3. Make the most of your tax bracket
Before completing a year-end strategy that adds to your income, you should see if you can afford to “run up the income tax brackets,” Dietz said. Typically, this involves a tax projection to see how much more income you can receive in your current bracket.
For example, you can use this strategy if you’re weighing a year-end partial Roth individual retirement account conversion or required minimum distributions from an inherited IRA, he said.
It’s also smart to know your tax bracket when deciding whether to defer income — such as a bonus or capital gains — into 2024.
4. Weigh strategies that stretch into the new year
Most tax planning must be complete by Dec. 31, but there are a few ways to trim your tax bill between Jan. 1 and the federal tax deadline. If you’re short on cash, these could wait until early 2024.
- Pretax IRA contributions: You can still make up to $6,500 in pretax IRA contributions ($7,500 for age 50 and older) for 2023, which may offer a deduction. However, you need to check IRA tax break eligibility first.
- Health savings account contributions: You can also save up to $3,850 (or $7,750 for family plans) in a health savings account, which offers a “triple threat” for tax breaks, noted Louise Cochrane, a certified public accountant and enrolled agent in Alameda, California. You can claim an upfront deduction, tax-free growth and tax-free withdrawals for qualified medical expenses.
