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Nov 27, 2023

Year-End Tax Planning Tips for 2023

Sponsored Content provided by John B Zachary - Wealth Advisor, Pathfinder Wealth Consulting

As 2023 is coming to a close, it's a great time to start thinking about year-end tax planning. For many individuals and businesses taxes can be a significant financial burden, and perhaps, often a surprise when the tax man comes knocking. However, with proper planning, you can optimize your tax situation and potentially save a substantial amount of money. In this article, I’ll cover some potential year-end tax planning tips for 2023.

1) Review Your Current Financial Situation
Before diving into tax planning, it's crucial to assess your current financial situation. Review your income, expenses, investments, and assets. At Pathfinder, we believe everyone should have a financial plan, customized for you, to lay the groundwork for future decision making. This will provide a clear picture of your overall financial health and help you make informed decisions.

2) Maximize Retirement Contributions
Contributing to retirement accounts is a great way to reduce your taxable income. It also checks off another very important goal – saving for retirement! Consider maximizing your contributions to 401(k) plans, IRAs, or other retirement accounts. For 2023, the contribution limits are $22,500 for 401(k)s and $6,500 for IRAs, subject to some eligibility restrictions. If you’re lucky enough to be over age 50, you can put an additional $7,500 into a 401(k) or $1,000 into an IRA. Keep in mind, IRAs give you until the tax filing deadline to make prior year contributions. Health Savings Accounts (HSAs) or dependent care FSAs (for those with children in daycare or preschool) are also a great way to reduce your taxable income. 

3) Harvest Investment Losses
The last 2 years have been challenging for stock market investors. If you have investment losses in your portfolio, consider realizing those losses by selling the underperforming assets. Capital losses can offset capital gains and potentially reduce your overall tax liability. Keep in mind that there are rules and limitations on capital loss deductions, so consult with your financial advisor or tax professional for guidance.

4) Accelerate or Defer Income
Your income can significantly impact your tax liability. Depending on your current financial situation, you might want to accelerate or defer income. For instance, if you expect to be in a lower tax bracket next year, it could be beneficial to defer income until 2024. On the other hand, if you anticipate higher income next year, accelerating income into 2023 might be a prudent tax-saving strategy. 

5) Charitable Giving
Charitable contributions can be an effective way to reduce your taxable income while supporting causes you care about. Consider making donations to qualified charitable organizations before year-end. If you’re unable to itemize deductions on your taxes, and if you are over age 70 ½, you may want to consider a Qualified Charitable Distribution (QCD), which allows you to send money from a retirement account directly to a charity and avoid taxes on the distribution. For either method, ensure you keep proper documentation of your donations for tax purposes.

6) Review Your Estate Plan
Estate planning is not just about passing on assets; it's also about minimizing the tax impact on your heirs. Review your estate plan to ensure it aligns with your financial goals and includes strategies to minimize estate taxes. This might involve gifting assets, setting up trusts, or other advanced planning techniques.

7) Take Advantage of Tax-Efficient Investments
Investing in tax-efficient vehicles like index funds, ETFs, municipal bonds, or tax-managed funds can help you minimize the tax impact on your investment returns. These types of investments are designed to reduce capital gains distributions or limit taxable investment income and can be a smart choice for certain investors.

8) Consider Tax-Efficient Withdrawals
If you are retired, or nearing retirement, consider the order in which you withdraw funds from your investment and retirement accounts. The sequence in which you tap into your savings can have a significant impact on your overall tax liability. At Pathfinder, we create a withdrawal strategy that aligns with our client’s financial goals and minimizes taxes. For retirees, we will often take additional money out of IRAs before year-end to maximize their tax bracket and lower the potential impact of higher tax rates in the future.

9) Plan for Education Expenses
If you have children, or are pursuing further education yourself, consider educational tax benefits such as 529 plans or Coverdell Education Savings Accounts. These accounts offer tax advantages for qualified educational expenses and can help you save on taxes while investing in education. Unfortunately, North Carolina residents no longer get a tax deduction for making contributions to 529 plans, but you can still potentially benefit from tax-free growth.

10) Stay Informed About Tax Law Changes
Tax laws are subject to change, and it's essential to stay informed about any updates that may affect your tax planning strategies. Consult with a tax professional, or financial advisor, who is up to date with the latest tax regulations to ensure you're taking advantage of all available opportunities. A good example of this the current income tax rates which are set to expire (“sunset”) at the end of 2025 and revert to the higher pre-2018 tax rates. 

The Pathfinder Wealth Consulting team recognizes that tax planning is not a one-size-fits-all approach, and it should be tailored to our client’s unique financial circumstances and goals. The sooner year-end tax planning begins, the more time our clients have to make strategic decisions that can have a substantial impact on their financial well-being. Our team of CERTIFIED FINANCIAL PLANNER™ professionals have extensive knowledge and experience crafting a comprehensive financial plan that is specific to your life’s goals and needs. To learn more about how we can establish your financial independence, visit our website; or give us a call at 910.793.0616. We are here to guide you forward.

Advisory services offered through Commonwealth Financial Network®, a Registered Investment Advisor.

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