Last-Minute Tax Deductions to Lower Your Tax Bill for 2023

The end of the year means it is time for festivities and Holiday cheer! It is also time to prepare for a new year and to make sure you didn’t miss any important deductions that could help lower your tax bill for 2023. The clock is ticking but thankfully, we still have time, so read on to learn about the last-minute tax deductions you can still take.

First, it’s important to understand what a tax deduction is. A tax deduction is an amount of money you can use to lower your gross taxable income. Each year, you can choose to take the standard deduction or you can choose to itemize your deductions. You would only choose to itemize if your combined itemized deductions were above the standard deduction. There are some deductions you can take whether or not you itemize, which are typically referred to as above-the-line deductions.

LAST-MINUTE TAX DEDUCTIONS WHETHER OR NOT YOU ITEMIZE:

1. Retirement Contributions

Boosting your retirement savings not only secures your financial future but pre-tax contributions also provide immediate tax benefits. While you have until the tax filing deadline of April 15, 2024, to contribute to an IRA for the current year, you must make your final contributions to most workplace retirement plans, such as a 401(k) or 403(b) by December 31, 2023. You can contribute up to $22,500 in total combined traditional and Roth contributions. If you're 50 or over, you can make additional catch-up contributions of $7,500. If you choose to make traditional contributions, they will reduce your taxable income dollar for dollar.

2. Health Savings Account (HSA) Contributions

HSAs offer a unique opportunity for tax-deductible contributions. Contributions can be used for qualifying medical expenses, providing a tax-efficient way to manage healthcare costs. While you also have until the April tax filing deadline to contribute, you can put away up to $3,850 for self-only coverage and $7,750 for family coverage. Contributions can help to lower your taxable income, and distributions are tax-free if they are used for qualified medical expenses. HSA assets are also not subject to the “use it or lose it” rule. Unused funds may be used to pay for future qualified medical expenses.

3. Investment Losses

Tax-loss harvesting involves strategically selling investments that have experienced losses to offset capital gains. This can be a valuable tactic for minimizing your taxable investment income. This strategic approach allows you to sell investments that have decreased in value, replace them with reasonably similar alternatives, and leverage those losses to offset realized investment gains and, potentially, up to $3,000 of regular income annually. The outcome is a reduction in your tax burden, leaving more of your money invested and actively working for you. Additionally, any unused losses can be carried over to future years.

It's important to note that tax-loss harvesting is complicated. Wash sale rules may come into play, preventing you from selling an investment for a loss and reinvesting in the same, or substantially identical one, within 30 days prior to or after the sale. Failure to adhere to these rules could result in the loss of the intended tax benefit. An exception worth noting is that wash sale rules do not currently apply to cryptocurrencies, as they are not regulated as securities. This means you can sell depreciated coins, repurchase them immediately at the same price, potentially realizing the loss while retaining ownership of the asset. It's essential to be aware, however, that pending legislation related to cryptocurrency regulations might close this loophole. Therefore, staying informed about any changes is crucial, and consulting with a financial and tax professional can help you navigate this strategy effectively.

4. Energy-Efficient Home Improvements

Homeowners embracing sustainable living through energy-efficient upgrades may qualify for tax credits. Solar panels, energy-efficient windows, and other eco-friendly improvements not only contribute to a greener environment but also offer significant tax advantages. These new federal tax credits will be in place for 10 years – through 2032. Also, while the tax credit amount is mostly limited to 30% of the project cost, the previous lifetime cap of $500 has been changed to an annual cap of either $1,200 to $2,000 depending on the efficiency improvements you make. This means you will be able to claim credit for more projects, especially if they are spread out over multiple years.

5. Educator Expenses:

Teachers, counselors, and principals who aren’t reimbursed for buying supplies can deduct up to $300 of out-of-pocket classroom expenses for 2023. If they’re married to another educator and they’re filing jointly, the limit rises to $600. Qualified expenses include books, supplies, computer equipment and software licensing or services, and any other teaching material that you had to buy during the tax year for the development of a course and in the classroom.

To claim the above-the-line deduction for educator expenses, you have to put in at least 900 hours of work in a given tax year. If you’ve taken money from a Coverdell savings account without paying taxes or you’ve received non-taxable funds from a tuition program, you’re required to subtract those amounts from the total number of educator expenses.

6. Business Expenses

Self-employed individuals have a myriad of business expenses that may be deductible. From office supplies to business-related travel, carefully review your expenses to identify legitimate deductions. Working with an accountant or tax professional can ensure you maximize your business-related tax benefits.

7. Qualified Small Business Deduction

Small business owners can benefit from the Qualified Business Income Deduction (QBI), a significant deduction that can reduce taxable income. Consult with a tax professional to navigate the complexities of this deduction and optimize your overall tax strategy.

LAST-MINUTE TAX DEDUCTIONS IF YOU ITEMIZE:

1. Charitable Contributions

The holiday season tends to bring out generosity for many. Make your charitable donations count by ensuring you have detailed receipts for each contribution. Whether it's a monetary donation or goods, keeping thorough records is vital for claiming deductions on your tax return.

2. Medical Expenses

Deducting medical expenses can provide significant tax relief. Keep in mind that only expenses exceeding 7.5% of your adjusted gross income are eligible. Schedule necessary medical appointments, purchase prescription medications and consider elective medical procedures to maximize this deduction.

3. Long-Term Care Premiums

Long-term care premiums are calculated slightly differently than medical expenses are. Long-term care insurance premiums are tax-deductible to the extent that the premiums exceed 10% of an individual's AGI. There is a deduction limit based on your age, and the insurance must be "qualified”.

4. State and Local Taxes (SALT)

With the SALT deduction now capped at $10,000, prepaying state and local taxes before year-end can be a strategic move. However, it's crucial to understand the rules and limitations. Consult with a tax professional to determine the optimal approach for your specific situation.

Comprehensive record-keeping is essential for a smooth tax filing process. Maintain detailed records of your deductions, income, and expenses. Use digital tools and apps to organize your financial information, making it easier to claim deductions and comply with tax regulations.

As you prepare to close out the year, ensure that you've made the most of these last-minute tax deductions. Keep in mind that tax laws can change, so consult with a tax professional or reach out to one of our licensed financial advisors for personalized guidance based on your unique financial situation. By maximizing your deductions, you can reduce your tax liability and enhance your financial well-being. So, this season, remember to not only spread joy but also take the right steps toward reaching infinite heights!

*The opinions voiced are for general information only and are not intended to provide specific advice or recommendations for any individual.