It might seem a bit early to think about your 2023 taxes, but as the year draws to a close, it's the perfect time to take a closer look at your financial situation and make some strategic moves that can help you minimize your tax liability come April.
Year-end tax planning isn't something you do at the last minute; it's a series of thoughtful steps you can start taking right now. In this series, we’ll explain eight key actions you can take during this last quarter of the year to save money on your 2023 taxes.
Contribute to Your HSA (Health Savings Account)
A Health Savings Account (HSA) can be a powerful tool for both managing your healthcare costs and reducing your taxable income. HSAs allow you to set aside pre-tax dollars to cover future qualified medical expenses. Contributions to your HSA are tax-deductible, and the earnings grow tax-free. To make the most of this tax-advantaged account, consider maximizing your contributions to your HSA before the year ends.
For the 2023 tax year, you can contribute up to $3,650 if you have self-only health insurance coverage or $7,300 for family coverage. If you are 55 or older, you can also make an additional $1,000 catch-up contribution. By increasing your HSA contributions, you not only reduce your taxable income this year but also build a valuable fund for future healthcare expenses.
If your employer offers an HSA account they may make an annual contribution to the account. If you’re self-employed or don’t have access to an employer-sponsored HSA, you can set up your own through most financial institutions.
Even better, the money you contribute to your HSA never expires and can be used years into the future. Just keep in mind that if you’ve taken money out of your HSA this year to pay a medical expense, that withdrawal will be counted as income on this year’s income tax return.
Contribute to a 529 College Fund
If you have aspirations of sending your children or grandchildren to college, establishing or contributing to a 529 college savings plan is a strategic financial move. These plans offer a tax advantage, as contributions are tax-deductible on the state level. While contributions aren’t deductible on the federal level, any earnings in the account grow tax-free as long as they are used for qualified education expenses.
In 2023, you can contribute as much as you like to a 529 plan, but contributions above $16,000 per year ($32,000 for married couples filing jointly) may be subject to gift tax. Nevertheless, contributing now can help you leverage potential state tax deductions while investing in your loved ones' future education.
Not sure your child or grandchild will attend college? Funds in a 529 account can also be used for vocational and trade school tuition and fees or elementary and high school tuition costs.
Adjust Your Tax Withholdings
If you are an employee, form W-4 determines how much income tax is withheld from your paycheck each month. It's essential to review and, if necessary, update your withholding information, especially if you've experienced significant life changes such as marriage, divorce, the birth of a child, or changes in your income during the year.
Adjusting your tax withholdings can help you avoid overpaying taxes throughout the year, leaving you with more money in your pocket. On the other hand, failing to update your W-4 could result in underpaying your taxes, which means needing to make a tax payment instead of receiving a refund come tax season, as well as potential penalties. Consult with a tax professional or use the IRS's online withholding calculator to determine the correct withholding for your specific circumstances.
If you work as a 1099-independent contractor or own a business, you should meet with your tax professional to determine if you need to make any changes to the structure of your business or establish retirement accounts, before the end of the year.
Schedule Medical Procedures Strategically
Medical expenses can add up quickly, and the tax code provides a deduction for qualified medical expenses that exceed 7.5% of your adjusted gross income (AGI) for the 2023 tax year. To maximize your deduction, consider scheduling necessary medical procedures before the year ends.
While not every medical need can be planned ahead of time, if you know you’ll need or want an elective surgery, try to schedule it before December 31. Similarly, if you’ve met your out-of-pocket maximums for health or dental insurance, now is the time to get all members of your family in for any remaining check-ups or follow-up procedures.
If you don’t think they’ll meet the threshold for medical deductions this year but anticipate a large medical bill like a birth or surgery next year, consider delaying any unnecessary medical work until January to take advantage of the medical expenses deductions next year.
Be sure to keep detailed records of your medical expenses, including bills, receipts, and insurance statements, to support your deduction claims.
Looking Out for Your Family and Your Finances
Looking at your finances and seeing where you can save money on your taxes isn’t just about finishing the year off strong and getting organized for tax season. It's about making strategic moves that position you for success now and help protect and support your loved ones in the future.
In part two of our year-end tax planning series, we explore even more strategies to help you keep more of your money where it belongs – in your pocket.
This article is a service of the Law Office of Keoni Souza, LLC, an estate planning law firm in Honolulu, Hawaii. We don’t just draft documents; we ensure you make informed and empowered decisions about life and death, for yourself and the people you love. That is why we offer a Family Wealth Planning Session, during which you will get more financially organized than you have ever been before and make all the best choices for the people you love. You can begin by contacting our office today to schedule a planning session and mention this article to find out how to get this $750 session at no charge.
Disclaimer: All information on this website is for informational purposes only and is not legal advice. You should contact an attorney trained to work with families on estate planning matters regarding your specific situation. Use of and access to this website or any of the email links contained within the site do not create an attorney-client relationship between the Law Office of Keoni Souza, LLC, and any users or any other party.