2023 Year-End Tax Planning Checklist

Sep 01, 2023 |

With a few weeks remaining in 2023, there are still relatively simple steps to mark off your year-end tax planning checklist to help lessen the burden in April 2024. 

Verify withholding and correct underpayments

Now is a good time to double-check your withholding and make any necessary adjustments.

Withholding, the process by which employers deduct taxes from employees’ paychecks, acts as a prepayment towards annual tax liabilities. Regularly reviewing pay stubs and ensuring alignment with expected tax obligations is crucial.

Concurrently, correcting underpayments demands proactive measures to address any shortfalls in tax contributions. This involves adjusting withholding allowances on Form W-4, a key document in the tax landscape. The failure to diligently verify withholding and rectify underpayments can lead to financial repercussions, including penalties and interest.

Although increasing your final estimated payment will only correct a Q4 2023 underpayment, increasing withholding can correct underpayments retroactively. IRS lumps all withholding payments together and treats them like they were made in equal parts across all four quarters.

If you are working with a tax professional, they will likely have already done projections to ensure accurate estimated investment and other income payments. But if you are doing your own taxes, visit the IRS withholding calculator and see what, if anything, needs to be done.

Review income and deductions

Taking a closer look at your earnings and expenses is a crucial part of year-end tax planning. Start by reviewing your annual income, covering your salary, bonuses, and any other money you’ve made. Anticipate any extra income you might get before the year ends, so you can plan accordingly and manage taxes effectively.

At the same time, check out possible deductions that can help lower your taxable income. Review your business expenses and see where you can maximize deductible items. Look into medical expenses and charitable contributions, identifying deductions that fit your financial goals and contribute to lowering your taxable income.

By carefully going through your income and deductions, you get a clear picture of your financial situation. This empowers you to make smart decisions, like keeping meticulous records to optimize deductions or timing when you recognize income. This practical approach helps you navigate the end of the year with a well-thought-out financial strategy, working towards reducing your tax bill and improving your overall financial health.

Max out your 401(k)

The maximum tax-deferred contribution to a 401(k) retirement plan reached $22,500 for individuals under age 50 in 2023. Individuals who are 50 or older by the end of the calendar year can make additional “catch-up” contributions of up to $7,500, for a total of $30,000 in 401(k) contributions in 2023. If you have celebrated or will celebrate, your 50th birthday in 2023 and haven’t taken advantage of the catch-up contributions, there’s still time to do so before year-end.

Maximize HSA as part of your year-end tax planning checklist

For several reasons, maxing out 401(k) contributions can be a sound financial strategy. Firstly, it provides immediate tax advantages, as contributions to a traditional 401(k) are often tax-deductible, reducing your annual taxable income. The tax-deferred growth on earnings means your investment can compound over time without incurring immediate tax obligations. Additionally, if your employer offers a matching program, contributing the maximum amount ensures you take full advantage of this benefit, effectively doubling your retirement savings. By consistently contributing the maximum allowed, you establish a disciplined approach to saving, promoting financial stability and long-term wealth accumulation. The accumulated funds can provide greater retirement security, maintaining your standard of living and covering essential expenses during your post-working years.

Moreover, contributing to a traditional 401(k) allows for potential tax advantages in retirement, particularly if you anticipate being in a lower tax bracket. It’s advisable to consider individual financial circumstances and consult with a financial advisor to determine the most effective retirement savings strategy.

If you are eligible to contribute to a health savings account (HSA), remember that the IRS has increased the maximum allowed contributions to $3,850 for an individual or $7,750 for a family in 2023. Individuals who are 55 or older by the end of the calendar year can make additional “catch-up” contributions of up to $1,000.

Since money in an HSA account remains yours and contributions reduce taxable income, maximizing contributions is a smart tax planning move. Everyone eventually has medical expenses, and using pre-tax money to pay for them is almost as good as getting a 20 percent (or more) discount.

Year-end gifting

Year-end gifting has taken on added strategic significance with the notable 2023 annual gift tax exclusion increase to $17,000, a substantial doubling to $34,000 for married couples. This elevation in limits provides a golden opportunity for tax-free gifting, constituting a crucial element in the realm of effective estate planning.

To fully capitalize on these advantages and strategically maneuver assets out of potentially taxable estates, individuals—especially those who have yet to leverage the annual gift tax exclusion—should proactively seek guidance from their estate planning team.

The augmented limit, particularly advantageous for couples, serves as a catalyst for a proactive wealth preservation strategy. Collaborating with seasoned professionals ensures the development of a customized approach that seamlessly aligns with specific financial goals and circumstances. This tailored strategy contributes to a tax-efficient estate plan and plays a pivotal role in securing the financial well-being of future generations. As the year draws to a close, individuals increasingly need to engage with their estate planning professionals to navigate this opportune landscape and fortify their financial legacy.

Action your year-end tax planning checklist

Not every one of the above tips in this year-end tax planning checklist will be useful for every person. Still, anyone who is able to use more than a few of them may well be able to benefit from the more advanced personalized planning offered by our financial planning professionals.

This article was originally published on December 12, 2018. Subsequent updates were made on November 8, 2019 and December 14, 2020, and November 17, 2022, and October 31, 2023.

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