Top Year-End Tax Planning Tips

Well, folks—it’s the most wonderful time of the year.

No, we’re not talking about the holidays, even though Aunt Jeanine’s famous cranberry eggnog souffle does only come once a year.

It’s the tax season countdown! Woo-hoo! Only a few more sleeps until the tax man comes down your chimney, demanding his share of the milk and cookie dough you’ve been working hard for all year. (Get it? Cookie dough?)

Seriously, though—Tax Day may not arrive until April 15, 2024, but there are some financial moves you can make before year’s end that could have a huge impact on how much dough you’ll owe the tax man. And if you’re like most people, a little extra cash could go a long way right now.

Now, even though paying taxes can be a bummer, don’t let desperation (or the desire to outsmart Uncle Sam) drive your decision-making. Before you make any end-of-year financial decisions, make sure you’re looking at the big financial picture—not just your upcoming tax bill. In other words, don’t follow these tips just for the tax break. It’d be plain silly to go buy a $60,000 electric car just so you can get a $7,500 tax credit.

So, keep the big picture in mind as we go over these end-of-year tax-saving tips, and see which of these strategies makes sense for you and your tax situation.

 

1. Check Your Paycheck Withholding

Every time you get a paycheck, your employer withholds taxes to send to the IRS. When tax time rolls around, that’s when you find out if you had too much or not enough taxes withheld from your paycheck.

Withheld too much? You’ll get a tax refund. Withheld too little? You’ll have to cut a check to the IRS. No thanks!

If you almost had a heart attack from your tax bill last year because you didn’t have enough money withheld from each paycheck, you can take steps between now and December 31 to make sure you never owe Uncle Sam that much again!

You might think the goal is to get a big fat refund from the IRS each year, but getting a huge refund means you’ve been loaning the government your money for free all year long! Who wants that? No thanks. Instead, you want to get as close to zero as possible—nothing owed and no fake “refund” of money that was already yours to begin with. We want that money working for you, especially if you’re working the Baby Steps and kicking debt to the curb!

2. Defer Your Income

Income is taxed in the year you receive it, so if you’re able to defer any income until January 1, 2024, or later, you’ll save on this year’s tax bill. Now, we know what you’re thinking—how am I supposed to postpone my salary for a whole month just to save a bit on taxes? We get it. Most people aren’t in a position to go without their base income for the month of December. But some people are able to defer their year-end bonus into next year if their company allows it.

Don’t settle for tax software with hidden fees or agendas. Use one that’s on your side—Ramsey SmartTax.

And if you’re self-employed or a freelancer who is looking for ways to save, consider delayed billings. Wait until the end of December to bill your clients. That way, you’ll receive those payments at the beginning of next year.

Before you use this as a last-minute tax-savings strategy, consider whether or not that extra income will push you into a higher tax bracket next year. Deferring your income only makes sense if you expect to be in the same or even a lower tax bracket in 2024.

3. Adjust Your Retirement Account Contributions

One of the most straight-forward ways you can save on this year’s taxes is to contribute more to your tax-advantaged retirement accounts. We’re talking retirement accounts like an employer-sponsored 401(k) or 403(b), or an individual retirement account (IRA).

Traditional 401(k)s and traditional IRAs are funded with pretax dollars, which just means you can lower your tax bill this year by writing off your contributions as a tax deduction. Sweet! But since you’re not paying taxes on the money you put into your traditional IRA this year, you’ll pay taxes on that money and its growth when you take the money out in retirement (that’s why we recommend going with Roth 401(k)s and Roth IRAs). And who knows what the tax rates will look like by then!

The IRS has increased contribution limits for both 401(k)s and IRAs over the past few years due to inflation, and we’re seeing that again with the 2023 and 2024 limits:

Contribution Limits

	2023	2024
401(k)	$22,500	$23,000
IRA	$6,500 ($7,500 for those aged 50 and older)	$7,000 ($8,000 for those aged 50 and older)1,2

Now, some people will tell you to max out your contributions to save as much on this year’s taxes as you can. But don’t go jumping on that bandwagon just yet. There’s a time and a place for everything—and that applies to maxing out your 401(k) too.

Here’s the deal: If you decide to max out your 401(k), you’re making a choice not to use that money until you retire. Because if you take money out before age 59 1/2, you’ll have to pay early withdrawal penalties and any taxes you owe on the money you take out.³ Your 401(k) is your nest egg, not a piggy bank!  

That’s why we recommend saving 15% for retirement when you’re ready to start investing—because you need to keep some room in your budget for other important financial goals, like saving for your kids’ college funds (Baby Step 5) and paying off your house early (Baby Step 6).

Once there’s enough money set aside for Junior’s college education and you send your last mortgage payment to the bank, then you can start thinking about maxing out your 401(k).

4. Take RMDs From Traditional Retirement Accounts (if You’re 73 or Older)

Okay folks, if you’re 73 or older, listen up. Non-Roth IRA accounts—including traditional IRAs, SEP-IRAs, 401(k)s, 403(b)s, and SIMPLE IRAs—have a deadline for what’s called required minimum distributions (RMDs).⁴ And if you don’t take your RMDs by the end of the year, you could face some steep penalties.

Yep, you read that right. Uncle Sam actually punishes some people for not taking out their own money from their own retirement account on time. Sheesh.

The IRS sets a minimum amount that you have to withdraw from your accounts every year. That amount changes each year, and that’s because it’s based on your life expectancy and the amount of money you have saved in your retirement accounts (except for your Roth IRA).⁵ 

If you’re 73 or older and don’t take your RMD by the IRS deadline (December 31) or you don’t take out enough money, that mistake will probably cost you a whopping 50% tax on the amount you should have taken out.⁶ 

5. Use Your Gift Tax Exclusion

The gift tax may sound like a Christmas wish list nightmare, but Santa has nothing to do with it. The gift tax is Uncle Sam’s way of taxing you for the transfer of money or property (think stocks, vehicles or land) to other people. As Charlie Brown would say, “Good grief! We can’t even give a simple gift without the government getting involved?”

The 2023 annual gift tax exclusion is $17,000 per person, per recipient. For married couples, the limit is $17,000 each, for a total of $34,000. If you exceed the gift tax exclusion amount, you may have to file a gift tax return and some of your gift could count toward your lifetime gift exclusion.⁷

This is where it gets complicated, but stick with us, folks.

Not only do you get the $17,000 annual gift tax exclusion for 2023, you also get a $12.92 million lifetime exclusion ($13.61 million in 2024). So when you give away more than the annual gift tax exclusion, that excess “spills over” into your lifetime gift exclusion.⁸

For example, let’s say you’re married and want to give your four grandkids a gift of $50,000 each to help them pay for college. If you give that money to the grandkids all in the same year, you and your spouse will use up your $34,000 annual exclusion ($17,000 per person, per recipient). But the good news is that you probably won’t have to pay taxes on it because the extra $64,000 ($200,000 - $136,000) goes toward your lifetime exclusion.

So as long as the excess of your annual gift amounts don’t continue piling up year after year to exceed that $12.92 million, you shouldn’t have to worry about paying taxes on your gifts.

6. Set Yourself Up to Take Advantage of Tax Deductions and Credits

Believe it or not, you can still make some financial moves before year’s end to make the most of tax deductions. A few of these moves require you to make payments now (that you’d have to make in January anyway) to save on taxes in April, but if you want in on these last-minute savings strategies, you’ll have to get the ball rolling as soon as possible! Let’s go over the details.

Pay your property tax bill early.

If you own a home or rental property, chances are, you have your estimated property taxes rolled into your monthly mortgage payments.

But for those of you who don’t have a mortgage or don’t include your property taxes in your mortgage payment, you can reduce your taxable income by paying your property tax for the year in full by December 31. That way, you can write off your property taxes when you file your return.

Here's a list of property types that are tax-deductible:

• Primary home
• Qualified co-op apartments
• Vacation homes
• Land
• Property outside the U.S.
• Cars, RVs and other vehicles
• Boats^9,10

To write off your property taxes, you’ll have to itemize deductions, so make sure you would be saving more by itemizing rather than taking the standard deduction.

The standard deduction for tax year 2023, by the way, is $13,850 for single filers and $27,700 for married couples filing jointly.¹¹ And looking ahead, those numbers are increasing to $14,600 for single filers and $29,200 for married couples filing jointly.¹² As the IRS continues to increase those numbers year after year, more people will come out on top by simply taking the standard deduction over going through the hassle of itemizing.

Pay your January mortgage bill early.

Along the same lines as deducting property tax is your mortgage interest deduction.

If you bought your primary home or a second home after December 15, 2017, you can deduct the mortgage interest you paid during the tax year on the first $750,000 of your mortgage debt (and on the first $1 million of your mortgage debt if you bought a house on or before December 15, 2017). If you are married filing separately, the mortgage limit drops to $375,000.¹³

A simple end-of-year strategy to stretch this deduction to its limit is to make your January mortgage payment before December 31. That way, you can deduct the interest portion of your January payment (along with the rest of the interest you paid this year) on Schedule A of your 2023 tax return. Again, you’ll have to itemize to get this deduction, but with your mortgage interest added into your list of itemized deductions, you might be able to beat the 2023 standard deduction amount. Sweet!

Make any last-minute charitable contributions.

The IRS made a lot of special adjustments for taxpayers during the COVID pandemic from 2020–2021. One of those temporary rule changes allowed taxpayers to claim qualified charitable contributions, whether they itemized or took the standard deduction.

Unfortunately, that rule change expired in 2022, so for the 2023 tax year, you can only claim charitable contributions if you itemize. But if you plan on donating big items like furniture, cash, a vehicle, or even a house to a qualified organization, you may come out on top by itemizing instead of taking the standard deduction, anyway.

To count your contributions toward your deductions, keep a detailed list of donations and recipients, and always get a receipt or letter from the organization confirming the date and estimated value of your donation (for cash contributions, keep a bank record like a canceled check or statement).

Consider going electric.

Car prices are absolutely crazy out there, so if you’re in the market for a new (or new-to-you) car, you’re probably looking for as many ways to save a buck as possible. And the IRS has rolled out some pretty sweet tax incentives over the past several years to entice buyers to make the switch to EVs and hybrids.

The 2023 EV tax credit works by lowering your tax bill on a dollar-for-dollar basis. So if you owe the IRS $5,000 and you qualify for an EV tax credit amount of $3,500, you’d only be on the hook for $1,500. Sweet!

There are income limits to qualifying for the EV tax credit, and your vehicle also has to meet certain requirements. But if you meet all those qualifications, you could be looking at a credit of up to $7,500 for a new electric vehicle or up to $4,000 if you buy used.^14,15 

This tax credit is nonrefundable, which means if it helps you get your tax bill down to $0 and you still have some of that credit amount left over, you won’t be getting it back as a refund. But still, if you buy a qualifying vehicle before year’s end, you can claim the EV credit on your 2023 taxes and make Uncle Sam jealous by avoiding the gas pumps and lowering your tax bill!

Finish your energy-efficient home upgrades.

If you have home upgrades that you’ve put off all year or haven’t yet finished, let us introduce you to two tax credits that might just change your mind and help you save some last-minute money on for your taxes.

First, the residential clean energy credit. This credit is good for 30% of the costs of qualified clean energy home upgrades installed anytime from 2022 through 2023. We’re talking qualified solar electric panels, solar water heaters, wind turbines, geothermal heat pumps, and fuel cells. Even some of your labor costs could qualify for this credit.

Like the EV tax credit, the residential clean energy credit is nonrefundable, but good news: You can actually carry forward any unused credit and apply it to your taxes next year.¹⁶ Now that’s pretty cool!

Another credit to consider is the energy efficient home improvement credit, which could save you a maximum of $3,200 for 2023. But that $3,200 is broken down into annual credit limit amounts for specific items. For example, you can only get a credit of $250 per door for exterior doors (up to $500, or two doors, per year).  

Expenses you can claim for the energy efficient home improvement credit include qualified insulation, central heating and air units, water heaters, boilers, heat pumps, exterior doors, windows, and home energy audits.

This credit is nonrefundable, and unlike the residential clean energy credit, you can’t apply any unused credit to next year’s taxes.¹⁷

7. Consider a Roth Conversion

If you’re looking for financial moves you can make by end-of-year to save more on taxes at retirement, it’s hard to beat a Roth conversion.

A Roth conversion is simply the process of transferring funds form a traditional retirement account (like a traditional 401(k), 403(b) or IRA) into a Roth account.

The main reason you’d do a Roth conversion is so you can enjoy the tax advantages of a Roth IRA or Roth 401(k). Of course, you’ll have to pay whatever taxes you owe on the money you’re converting to get those benefits . . . but under the right circumstances, a Roth conversion could give your retirement savings a major boost over the long run. 

We said it before, but it’s so good we’ll say it again: With a Roth, you’ll get tax-free growth on your retirement savings and tax-free withdrawals at retirement. Sending the government fewer of your hard-earned dollars? We’re down with that!

No matter where you stand financially, a Roth conversion is a big financial move that could have a serious impact on your tax situation and investing strategy. That’s why you should always talk to a financial advisor before you get the ball rolling on yours.

8. Connect With a Tax Professional

The end of the year will be here before we know it, but there are plenty of moves you can make between now and then to save money on your taxes. Whether you’re looking to cut your 2023 tax bill down as much as possible or to save tax dollars when you retire, there are moves you can make before year’s end to set your financial goals in motion.

If you still have questions about year-end tax planning, reach out to a RamseyTrusted tax pro. They can walk you through all the different ways to save money on your taxes, both now and in the future. You don’t have to be stressed over the end-of-year time crunch. Get an expert in your corner so you can walk into the next tax season feeling like a boss.

Get a tax pro today!