3 Year-End Tax Considerations

Young couple reviewing invoices and doing family business plan. Concept of money and economic problem for man and woman living together
Young couple reviewing invoices and doing family business plan. Concept of money and economic problem for man and woman living together

The end of the year is quickly approaching. And while that means holiday soirees, family meals, and an overall attitude of gratitude, it is also an important time of the year to make sure your financial ducks are in a row. One of the most critical areas of wealth management is tax planning. As you begin to prepare for the coming tax season, here are three year-end considerations to focus on.

Maximize retirement accounts and HSAs

As we approach the end of the year, it’s important to take stock of your finances and make sure you’re taking advantage of all available opportunities to save for retirement. For many, that means making sure you’re contributing as much as possible to your employer-sponsored retirement plan, such as a 401(k) or 403(b). If you’re not already doing so, you should also consider opening an individual retirement account (IRA). And if you have a high-deductible health insurance plan, you can use a Health Savings Account (HSA) to save for medical expenses now and in retirement.

There are tax benefits to all of these retirement savings vehicles, which is why it’s important to try to contribute as much as possible before December 31st. With a 401(k) or 403(b), contributions may be made pre-tax, which reduces your current taxable income. With an IRA, you may be able to deduct your contributions from your taxable income. And with an HSA, your contributions are made with pre-tax dollars, and they grow tax-deferred and can be withdrawn tax-free in retirement to cover qualifying medical expenses.

Review investment accounts for losses

It’s also important to review your investment accounts for any losses. Realizing a loss can be disappointing, but it can also help you save on taxes. When you sell an investment for more than you paid, you incur a capital gain. The gains are taxed at different rates depending on how long you held the investment; short-term gains are taxed at your ordinary income tax rate, while long-term gains are taxed at a lower rate. If you sell an investment for less than you paid, you incur a capital loss. You can use capital losses to offset capital gains, which can lower your overall tax bill. You can also carry forward unused losses to offset gains in future years.

Position investment accounts to make updates for next year with the increased retirement plan contribution amounts

Investors should also take a close look at their portfolios and make sure their accounts are positioned for the future. For those who have retirement accounts, this may mean making some changes to how much money is being contributed. With the increased contribution amounts for next year — the annual contribution limit for accounts such as 401(k)s and 403(b)s will be $22,500, up from $20,500 in 2022, while the new contribution limits for IRAs will be $6,500 for those under 50 and $7,500 for those over 50 — it’s important to make sure that funds are available to cover the additional contributions. One way to do this is to position funds in a savings account or money market account so that they can be easily transferred into the retirement account when needed.

At Method Financial Planning, our aim is to help you make the most of your money so that you can achieve your personal and professional goals. Whether you’re a busy parent or a soon-to-be-retiree, we seek to help you feel confident in your financial picture and build a strong foundation for your future. Are you looking for a second opinion on your tax strategy? Don’t hesitate to reach out!

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