As the 2023 tax year hurtled towards its December 31st conclusion, a sense of urgency might set in. However, fret not, for opportunities to optimize your tax outcome still linger at the eleventh hour. Financial experts assure us that strategically leveraging certain tax-saving tools, even at this late stage, can offer significant benefits.
While “grand-scale tax strategizing might be a bridge too far at this juncture,” as certified financial planner Edward Jastrem of Heritage Financial Services aptly puts it, “low-hanging fruit” remains readily available for plucking. These readily implementable tactics can translate into either a reduced tax liability or a boosted refund.
Tax-Loss Harvesting: What Is It and How to Do It
One particularly potent strategy is tax-loss harvesting. This meticulously crafted approach involves the deliberate sale of underperforming investments to offset capital gains realized elsewhere in your portfolio. This effectively lowers your taxable income, potentially resulting in significant financial savings.
Monica Dwyer, another certified financial planner, elaborates on the practical application of this technique. As she explain, they’ve strategically divested certain bond funds that have experienced depreciation and reinvested those proceeds either in high-yield individual bonds or comparable, alternative mutual funds. “This maintains our clients’ desired asset allocation while simultaneously enhancing their tax efficiency.”
However, a crucial caveat exists: the dreaded “wash sale rule.” The IRS frowns upon the practice of selling an investment at a loss and subsequently repurchasing it (or a substantially similar asset) within a 30-day window surrounding the initial sale. Such maneuvers will not qualify for tax benefits, so meticulous adherence to this regulation is paramount.
Therefore, the overarching message is one of proactive engagement, not passive resignation. Even these eleventh-hour maneuvers can positively impact your final tax results. Embrace the “low-hanging fruit” philosophy, engage with a tax professional if necessary, and relish the satisfaction of seeing your tax burden diminish with each strategic step. Remember, in the domain of taxes, every optimized dollar signifies a victory.
Using Tax-Gain Harvesting as a Useful Trick
Another strategy, known as tax-gain harvesting, involves selling assets in a profitable brokerage account while in the 0% long-term capital gains bracket.
According to Andrew Herzog, a Certified Financial Planner and associate wealth advisor at The Watchman Group in Plano, Texas, tax-gain harvesting is “an often overlooked approach.”
Capital gains tax rates for 2023 for single filers:
- 0%: $0 to $44,625
- 15%: $44,626 to $492,300
- 20%: $492,301 or higher
Capital gains tax rates for 2023 for married filling together:
- 0%: $0 to $89,250
- 15%: $89,251 to $553,850
- 20%: $553,851 or higher
For the tax year 2023, individuals with a taxable income of $44,625 or less for single filers and $89,250 or less for married couples filing jointly may be eligible for the 0% capital gains rate. These rates are applicable to your “taxable income,” determined by subtracting the higher of standard or itemized deductions from your adjusted gross income.
Additionally, Herzog suggests employing tax-gain harvesting as a strategy. This involves selling profitable assets, followed by an immediate repurchase to reset the basis (original purchase price). This approach can effectively reduce future tax liabilities.
Donating to a Charity Could Reduce Your Tax Bill
While the joy of supporting a worthwhile cause often suffices as its own reward, contributing to a charity can also offer tangible benefits: namely, a lighter tax burden come April.
Donations made to registered charities are generally tax-deductible, allowing you to deduct the contributed amount from your taxable income. This effectively reduces your overall tax liability, essentially rewarding your generosity with financial savings.