Mid-year is here. Have you started thinking about your tax situation? Many people tend to think about taxes only when tax season rolls around. However, adopting a more proactive, year-round approach to tax planning can significantly impact your financial health.
Here, we delve into various tax strategies you should consider implementing now to save the most money come filing time.
Boost Your Retirement Contributions
Enhancing contributions to tax-advantaged retirement accounts such as 401(k) plans, Traditional Individual Retirement Accounts (IRA), or Health Savings Accounts (HSA) can be a highly effective strategy for tax mitigation. These contributions are often tax-deductible, thus reducing your taxable income. What’s more, the growth within these accounts is tax-deferred until distribution.
In 2023, you can contribute up to the following limits:
401(k) Plans: The contribution limit is $22,500, with an additional $7,500 allowed as a catch-up contribution for individuals aged 50 and over.
Traditional IRA: The contribution limit is $6,500, with an additional $1,000 allowed as a catch-up contribution for individuals aged 50 and over.
Health Savings Account (HSA): The limit is $3,850 for individual coverage and $7,750 for family coverage. Individuals aged 55 and older can make an additional catch-up contribution of $1,000.
Remember: If your employer matches 401(k) contributions (often referred to as “free money”), ensure you are contributing at least enough to get the full match.
Take Advantage of Tax-Loss Harvesting
Investors can benefit from a strategy known as tax-loss harvesting, which involves selling investments that have declined in value to offset the capital gains tax liability on investments that have grown. This strategy can be particularly effective during periods of market volatility, where certain asset classes may have experienced a significant decline.
Now that we’re well into mid-year, it’s an optimal time to review your investment portfolio. Look out for securities that have decreased in value and could be sold to offset capital gains and reduce your overall tax burden. However, be aware of the IRS’s “wash-sale” rule, which prohibits claiming a loss on sales of securities that are repurchased within 30 days.
Invest in Tax-Efficient Funds
Investing in tax-efficient funds — like index funds and exchange-traded funds (ETFs) — that feature low portfolio turnover can potentially lower your tax bill. These funds limit the frequency of taxable events by minimizing the realization of capital gains. Long-term investors, in particular, can benefit from the compounding growth these funds can offer while minimizing taxable distributions.
Make a Charitable Donation
For philanthropically inclined investors, contributing appreciated securities (stocks or mutual funds) instead of cash can offer a double tax advantage; you bypass capital gains taxes on the appreciated amount, and you get a tax deduction for the market value of the security, assuming a holding period exceeding one year.
Look Into Opportunity Zones
Opportunity zones are tax incentives that encourage wealthy individuals to invest in undercapitalized communities. Investing in these zones, you can potentially defer tax on prior gains until December 31, 2026. While maximizing your returns requires a bit of patience, these investments are a worthwhile consideration for investors looking to reduce their tax burden while promoting community development.
Start Planning for the Future
Effective tax planning doesn’t just look at the here and now but also casts an eye towards the future. Whether it’s considering estate planning to potentially reduce future estate tax liability, or planning for life events such as college expenses or home purchases, a proactive approach can set you on the path to financial security, and it’s never too late in the year to get started.
Meet With Your Financial Advisor
An invaluable step in mid-year tax planning is consulting with your financial advisor. They can help assess your current financial situation, plan for your specific financial goals, and adjust strategies to reflect any changes, such as significant life events or new tax laws.
Ready for a more proactive, comprehensive tax plan? Our tax services and strategies are designed to maximize your savings and align with your long-term financial goals, so you can keep more of your hard-earned money. Reach out today to learn more.
