As we get ready to wrap up the final weeks of 2023, I thought it would be useful to share some last minute tax savings tips that you can still implement at this point to reduce your 2023 tax liability. Some of these will apply to individuals, and some are more geared towards business owners. Let’s jump into it…
Prepay expenses and delay sending invoices or cashing checks: This may sound overly simple, but for small business owners it can be a very powerful tool. Since the vast majority of small business owners pay taxes on a cash basis, that means they are taxed on when they physically receive cash or deposit checks. So if you have a few large invoices you were thinking of sending out, or you have a pile of checks you were about to deposit, by waiting until 1/1/24 to cash those checks or send those invoices, you’ll push that income into 2024. The same is true on the expense side. You get to deduct any expenses you pay for (or charge to a credit card) in 2023, even if the expense applies to 2024. There are some limits to the amount of pre-paying of expenses you can deduct (generally, you can only pre-pay up to 12 months), but again, for most small business owners by making sure to accelerate potential purchases or payments of bills into 2023, you’ll capture those deductions in 2023 instead of 2024. Properly using your credit cards is also a useful tool. As long as the transaction is charged to your card in 2023, you’ll get the deduction in 2023, even if you don’t pay the card until 2024. This can be especially powerful if you have a credit card with a promotional interest free period, allowing you to float your cash flow well into 2024. The combination of pushing off income and accelerating deductions can be a powerful tool that may even keep you in a lower tax bracket and have a substantial impact on your tax bill.
Retirement contributions & HSA: There will always be a debate over whether pre-tax retirement contributions or post-tax contributions are more valuable. Of course it simply depends on your individual circumstances. However, there’s no question that maxing out all available pre-tax retirement contributions is an extremely powerful tax savings tool for individuals and business owners alike. For individuals, be sure you are maxing out traditional IRA’s (if you’re eligible) by 4/15/24, and don’t forget to make sure you’re maxing out any 401k or Simple IRA contributions offered by your employer. At the very least, try to do the minimum needed to get the full match that your employer may offer. Free money is too valuable to miss out on. For business owners, likewise be sure to max out any Solo 401k/SEP-IRA contributions (as both the employee and employer). If your business doesn’t have a retirement plan in place, you still have time to set one up before 12/31 (and in some cases, until the deadline for your tax return). For most non-business owners, you’ll be hard pressed to find another tax savings strategy that will have a greater impact on your tax liability than simply maxing out retirement contributions. You can reduce your tax liability by potentially as much as $37,000, and of course reap the benefits in the future of the long-term gains inside those retirement accounts. And for small business owners, you may be able to contribute well over $60,000 into your retirement accounts with a simple Solo 401k plan (or even into the six figures with more advanced retirement plans)! And of course if you prefer, you can make similar contributions on a post-tax basis. While those won’t reduce your tax liability now, the funds will grow tax free and you won’t be taxed on the gains or withdrawals in retirement. Essentially you’re trading immediate tax savings for long-term tax savings.
If you’re eligible for a HSA, again, be sure to max out your contributions for 2023. The HSA is literally the only tax savings tool that gives you a triple benefit:
- You get to deduct your contributions
- The funds grow tax free
- Withdrawals are tax free (as long as they are used for qualified medical purposes)
Donor advised funds & gifting long-term stock: This is one of my favorite tax savings strategies because it benefits you, and does good for the world. Win-win, as they say. For those of you that are inclined to give charitably, there’s no more powerful way than through gifting long-term stock. This has to be done correctly, or you won’t gain the full benefit, but it’s not complicated. As long as you’ve held a stock for more than one year, you can gift it directly to a 501c3 charity of your choice, and you get a double benefit: 1) you won’t pay any capital gains upon the ‘sale’ of the stock, and 2) you still get a full charitable deduction for the fair market value of the stock when it’s donated. I put ‘sale’ in quotation marks, because the key part to this strategy is that you don’t actually sell the stock. Rather, you instruct your broker to gift it directly to the charity. Doing it that way ensures that you pay zero capital gains tax and still get the full charitable deduction. If you accidentally first sell the stock, and then take that cash from the sale and donate the cash to the charity, you’ll still get the same charitable deduction, but you’ll have to pay capital gains tax on the sale of the stock. That’s a shame! Let’s take an example. Let’s say you paid $1,000 for some Google stock five years ago (although anything more than one year ago will work). Today the stock is valued at $10,000, and you’re in the 32% tax bracket. If you first sell the stock and then donate the cash, the result is you have a $9,000 taxable long-term gain, which will result in approximately $1,692 of tax owed (between capital gains tax and net investment income tax). You’ll then get to claim an itemized deduction for the $10,000 donation, which will save you $3,200. So the net result is savings of approximately $1,500. On the other hand, if instead of selling the $10,000 of stock, you give it directly to the charitable organization, you pay zero capital gains tax and you still get the full $10,000 donation. You’re getting a full $3,200 of tax savings in this case, saving you approximately $1,700. And again, the only thing you did differently here was give the stock directly to the charity instead of selling it and donating the proceeds!
If you want to claim a charitable deduction, but you’re not yet ready to give to an organization or you’re not yet sure who you want to give to, utilize a donor advised fund. These are very simple to set up at any major brokerage, and allows you to contribute cash (or long-term stock) and claim the charitable deduction now, while allowing the cash or stock to continue to be invested into the future. At some point down the road, whenever you’re ready, you get to decide which organization to donate the funds to.
Hiring children (plus IRA contribution): For those of you that operate a business as a Sole Proprietorship (or Single Member LLC taxed as a Sole Proprietor) or Partnership, you will especially benefit if you can find a legitimate way to hire your children under the age of 18 to work in your business. The reason here is that wages paid to children under 18 are exempt from social security and medicare taxes (unless the business is a corporation, in which case you do need to pay those taxes). Maybe your kids can help you with some end of year social media marketing, cleaning of your office space, website design etc. When you pay them wages, the business gets to deduct the wages, and as long as you pay the kids under $13,850 in 2023, the kids won’t pay any Federal income tax! It’s a major win-win for you, as the business owner, and the kids. If you want to supercharge this strategy, you could pay the kids up to $20,350, and then have the kids contribute $6,500 into a traditional IRA that you set up for them. The end result is the business gets a $20,350 deduction and the child still won’t pay any income tax, because the deductible IRA brings his/her taxable income down to the standard deduction amount of $13,850, which then wipes out their income to zero. Amazing. Just be sure you have solid justification to pay the child their salary commensurate with the work they are doing (like most strategies, documentation is the key).
Utilize capital loss carryovers and/or harvest capital losses: I feel like this strategy gets blown out of proportion a bit, but it’s definitely still worth mentioning. If you have any stocks that are down for the year, consider selling them before the end of 2023 so that those losses can offset any capital gains, or at the very least allow you to claim up to a $3,000 capital loss on your tax return. From the other angle, if you already have significant capital losses built up over the years, don’t let those go to waste (generally speaking they won’t pass on to your heirs after your death, so use them or lose them). Since the stock markets are up significantly in 2023, perhaps it could make sense to sell stocks and realize those gains now, and use your capital loss carryovers to offset the gains. Furthermore, while there is a ‘wash loss’ rule, there’s no such wash ‘gain’ rule. In other words, there’s nothing stopping you from realizing your gains (and having them be offset by your loss carryovers) and then immediately rebuying the stocks. Essentially you’ve reset your cost basis to the current fair market value without having to pay tax on the gains.
So while we’re very close to the end of the year, there’s definitely still time to significantly reduce your tax ability. If you’re interested in a call to discuss your tax savings opportunities, or you’d like more info about our quarterly tax planning services, feel free to book an appointment with us here to discuss one of our tax subscription packages!
