Just under three weeks remain before 2023 comes to an end. In no particular order, check the following before the end of the year to put yourself in a better position when completing your 2023 taxes in the new year.
Retirement Contributions
Personal
If your goal is to maximize your retirement contributions for 2023, you will invest $6,500 into an IRA (traditional, Roth, or a combination of the two) and another $22,500 into your 401(k). If you will be at least 50 years old by December 31, you can add another $1,000 to your IRA and $7,500 to your 401(k) as a catch-up contribution on top of the regular limits.
If you are eligible for a mega backdoor Roth, a maximum of $66,000 can be added to your 401(k) plan, not including catch-up contributions if eligible, when combining elective deferrals, employer contributions, and post-tax employee contributions.
See how much you have contributed throughout the year, and make additional contributions if available.
For IRAs, you have until April 15, 2024, to contribute towards your 2023 limit. (You will need to designate any contributions between January 1 and April 15 as either 2023 or 2024 contributions.)
Similarly, if you have contributed too much, withdraw those excess contributions by the end of the year, and the earnings on the excess contributions, to avoid penalties.
Business
Business owners and self-employed folks who have not set up their own retirement plans have until December 31 to start a 401(k) plan. You can have a 401(k) plan with just one employee, if that one employee is yourself! You have until the tax filing deadline to set up some small business retirement plans, but a 401(k) plan must be set up prior to the end of the year.
Retirement Withdrawals
If you are subject to required minimum distributions (“RMDs”) from any retirement accounts, be sure to take your RMD no later than December 31.
If you inherited a retirement account in the last few years, you may have an RMD regardless of your age. Your withdrawal options depend on whether you inherited the account from a spouse or a non-spouse.
Income
At some point in your financial independence journey, you might find that you make too much money to contribute to a Roth IRA directly.
Taxpayers filing as single or head of household have a reduced Roth IRA contribution limit beginning at $138,000 of income; the limit becomes zero when income reaches $153,000. Taxpayers using the married filing jointly or qualifying widow(er) status have a reduced contribution limit beginning at $218,000, with a limit of zero when income reaches $228,000. Married taxpayers filing separately follow the “single” limit if they did not live with their spouse at any point during the year, but have a reduced limit immediately, and a limit of zero when income reaches only $10,000.
Anyone can contribute to a traditional IRA regardless of income level, but the deductibility of those contributions is limited at higher income levels if you are covered by a retirement plan at work.
If you would like to contribute to a Roth IRA rather than a traditional IRA but make too much money, a backdoor Roth may be for you.
If you realize that your income level makes you ineligible to contribute to a Roth IRA, but you already made Roth IRA contributions, there is a solution: recharacterization. A recharacterization retroactively changes your Roth IRA contributions (and the earnings on those contributions) to traditional IRA contributions, or vice versa. Simply call your IRA custodian and let them know you would like to recharacterize your year-to-date contributions.
Once your Roth IRA contributions are recharacterized as traditional IRA contributions, it is as if you had made traditional IRA contributions from the start. You can then do the second step in the backdoor Roth shuffle so that your IRA contributions end up in a Roth account by the end of the year.
Another option is to simply withdraw the excess contributions (and the earnings on those contributions). It is then as if you had never made the IRA contributions, and the earnings on those contributions would be taxed as a capital gain. But since you had already allocated that money towards an IRA, your best bet is to leave it in the IRA—whether traditional or Roth—because it is tax-advantaged.
Moving nondeductible traditional IRA contributions to a Roth IRA via the backdoor Roth process is generally preferable to leaving nondeductible contributions in your traditional IRA.
Marital Status
“Check your marital status” sounds funny in a vacuum, but remember that your filing status options depend on your marital status under state law as of the literal end of the year. I know someone who got married at 11:45 p.m. on New Year’s Eve; they could not file as “single” for the year even though they were married for just fifteen minutes. On the other hand, I also know of a couple whose divorce became final on December 23; those individuals could only use the “single” filing status even though they were technically single for just eight days.
That person who got married at 11:45 p.m. on New Year’s Eve ended up paying a lot more in taxes than they would have had they simply waited thirty more minutes to tie the knot. If you are considering a late-year wedding, it might be worth checking into whether waiting until at least 12:01 a.m. on January 1 makes financial sense.
Relatedly, if you have a pending divorce case, it might be worth settling before the end of the year if possible rather than waiting until January to resolve the matter. I know of one couple that had their final divorce hearing on January 3. Had they scheduled the hearing a week prior, they could have saved money by being able to file their taxes as two single people rather than a married couple filing separately.
Whether filing a joint return, two separate returns, or two single returns even makes a difference is not automatic. Your individual circumstances determine what impact your filing status will have on your overall results.
Withholdings
Get a copy of your most recent pay stub and look at your federal and state income tax withholdings. You can use these to see if you have had too much or too little withheld from your pay to cover your expected tax liability for the year. Remember to count expected dividends, capital gains, and any other sources of income when estimating your tax liability.
If your current withholdings will put you in positive territory, then you do not need to make any adjustments. Of course, if you expect a large refund, it might make sense to reduce your withholdings so you receive a smaller refund for future years, and instead see more of that money up-front in your paycheck.
Health Plan
November and December are popular months for open enrollment for health plans and employer-provided benefits. This is the time of year when you can change coverage for the following calendar year without needing a qualifying life event.
Evaluate your current health care coverage to see if your current plan is still the best option for your current situation. Circumstances change from year to year, so the plan that was the best fit last year might not be the best fit for next year.
Even taking no action here is a choice because your current plan will generally remain the same for the following year if you do not update your coverage.
Employer Benefits
While you consider whether to change health plans, look at the full array of employer-provided benefits (if any) that may be available to you. It might make sense to make changes in this area, too. Your employer might be offering new options, or perhaps some existing options make sense now even though they have not been optimal in the past.
HSA Contributions
Similar to examining your retirement contributions history, check the contribution history for your health savings account.
The HSA contribution limit in 2023 was $3,850 for an individual with self-only coverage and $7,750 for an individual with family coverage. (Individuals who will be at least 55 years old by the end of the year can contribute an additional $1,000.) Contribute more if you can, preferably through payroll deductions so you save on Social Security and Medicare taxes in addition to income taxes.
You can contribute up to the full annual maximum if you had HSA-eligible coverage as of December 1, even if you only obtained that coverage towards the end of the year. Be careful, though—if you change your coverage in the following year away from an HSA-eligible plan, your contribution limit is retroactively prorated. Check out IRS Publication 969 for full details.
You have until April 15, 2024, to contribute towards your 2023 limit. Contributions via payroll deduction, though, typically only count towards the current year.
Automatic Transfers and Payments
While not strictly tax-related, check your automatic transfers and payments. A new year is a good time to reflect back and see what changes you can make in the year ahead. Make sure that your automatic investments are on track and that any automatic payment amounts are adjusted.
For example, our homeowners association dues will increase beginning in January, so I need to make sure that the updated amount gets paid. For folks with mortgages, an adjustment to the escrow portion of your payments to reflect changes in tax and insurance rates may be effective soon, so make sure you plan accordingly.
Address
If you have kept your address updated with your employer(s), mortgage provider, banks, and investments (including retirement accounts), then you are in good shape. If you have moved since you left an employer, be sure they have your current address so that you can receive your W-2 in a timely fashion. Same goes for any 1099s that you expect to receive: Be sure the issuer has your updated contact information. If you forget to include income on your tax return, expect an IRS notice at some point that will reflect extra taxes plus penalties and interest related to the unreported income.
You should also update your address with the U.S. Postal Service whenever you move.
You can also update your address with the IRS if you move mid-year rather than waiting for it to update automatically when file your next tax return.
Charitable Contributions
If your financial plans include charitable contributions, make them in December to get a tax break now rather than waiting until the following year. Or, if you know that itemizing deductions is not in the cards for 2023, consider waiting until January to make contributions you would otherwise make prior to the end of the year. If you “double up” on your charitable contributions every other year, you might be able to itemize rather than taking the standard deduction in those years.
If you want to donate, but are unsure of which organizations to sponsor, consider a donor-advised fund. This allows you to irrevocably set aside money for charitable purposes now, and then decide the specific organizations to receive the funds later.
Home Improvements and Major Purchases
Similar to charitable contributions, certain home improvement projects and other major purchases (like an electric vehicle) that are on the horizon can be timed to maximize tax efficiency.
For instance, if you will not get the full value of the electric vehicle credit for 2023, but expect a larger tax liability in 2024, it might make sense to wait until January to finalize the purchase. (The credit is nonrefundable, meaning it can reduce your tax liability to zero but cannot provide any additional benefit, and any unused portion does not carry over to future years.) If you would qualify for the full $7,500 credit, and your tax liability for 2023 will be only $6,500 in 2023 compared to $9,750 for 2024, you would get $1,000 more out of the credit by waiting until January to purchase the vehicle.
Business owners contemplating major purchases may wish to accelerate them to December to get a current-year tax deduction, or hold off until January if a 2024 deduction would be more profitable. The idea here is to be proactive rather than reactive.
Pass-Through Entity Tax
Business owners in certain states can make pass-through entity tax payments, but generally must do so before December 31.
Entities taxed as s-corporations and partnerships are pass-through entities, meaning they do not pay income tax directly but instead pass through the tax liability to their owners. Certain states allow those entities to voluntarily pay state tax at the entity level and provide a credit to the owners based on their distributive share of the tax paid, rather than having the owners themselves pay state tax directly. This allows the entity to claim a deduction on its federal return for state taxes paid, which reduces taxable income apportioned to owners.
Recordkeeping
My last suggestion is to take a look at your recordkeeping for the year. Make sure that you have documentation for all deductions you plan to take. Waiting until tax season (or much worse, an audit or court case) to gather and organize documentation will be much more difficult than doing it now.
Use the end of the year to look back and make changes before it is too late! Taking a proactive approach could save you a surprising amount in taxes this year, next year, or both.
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