Year-End Tax Strategies: Maximize Benefits Before 2023

As the year comes to a close, it's crucial to take advantage of tax strategies that can maximize your benefits. In this article, financial advisor Emily Johnson shares expert advice on three key strategies: taking required minimum distributions (RMDs), tax-loss harvesting, and charitable giving. By following these tips, you can ensure you're making the most of your retirement accounts, reducing your tax bill, and aligning your wealth with purpose and meaning. Don't miss out on these valuable opportunities before 2023 begins.

Take Advantage of Required Minimum Distributions (RMDs)

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One crucial tax strategy to consider before the new year is taking required minimum distributions (RMDs) from your retirement accounts. RMDs are the minimum amount of money that investors must withdraw from certain retirement accounts, such as pretax individual retirement accounts (IRAs) and 401(k)s, after reaching a certain age.

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Failing to take RMDs can result in a hefty tax penalty, so it's essential to put RMDs on your calendar and ensure you don't forget to take them. The penalty for not taking RMDs is 25% of the RMD amount that wasn't withdrawn, although there may be some cases where the penalty can be reduced.

It's important to note that the age at which you must start taking RMDs has recently changed. With the Secure 2.0 law, the age for starting RMDs has been raised to 73 from 72, starting in 2023. However, if you turned 72 in 2023, you must take your first RMD in 2024. Additionally, RMDs from Roth 401(k) and 403(b) accounts have been eliminated, but this provision doesn't take effect until 2024.

Reduce Taxes with Tax-Loss Harvesting

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Tax-loss harvesting is a strategy that can help reduce your tax bill by offsetting investment losses. It involves selling investments that are in the red (i.e., have decreased in value) and using those losses to offset profits on winning investments sold during the year.

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By taking advantage of tax-loss harvesting, you can potentially eliminate your capital gains tax bill entirely. Losses offset profits dollar for dollar, and any unused losses can be carried over into future tax years.

While stocks are typically the main focus for tax-loss harvesting, it's worth noting that significant losses can also occur in bonds. However, it's important to evaluate each investment individually and consider the strategic reasons for selling. Keep in mind that there are anti-abuse measures in place, known as 'wash sale' rules, which prevent investors from claiming a loss if they buy back the same or a similar security within 30 days.

Optimize Tax Benefits through Charitable Giving

As we approach the end of the year, it's a great time to consider charitable giving as a way to reduce your tax bill and make a positive impact. One tax-efficient strategy is making a big upfront donation to a donor-advised fund. This allows you to claim a significant tax write-off in the year of the donation, while still having the flexibility to distribute the funds to charitable causes in future years.

Another option for older Americans is a 'qualified charitable distribution' (QCD), which involves donating directly from an IRA. The amount donated counts towards your annual RMD, providing a tax advantage for individuals who regularly give to charity.

By incorporating charitable giving into your year-end tax planning, you can not only reduce your tax burden but also align your wealth with purpose and meaning. Take the time to reflect on what causes are important to you and explore the various ways you can make a difference through your philanthropic efforts.

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