As the year winds down, now is the time to take steps to cut your 2023 tax bill while being mindful to not defer so much taxable income that you push yourself into the next tax bracket in 2024. Prior to December 31st:

  1. Increase your 401(k) and 403(b) contributions if you haven’t been contributing at the maximum rate all year. This year you can put up to $22,500 into your 401(k) or 403(b) plan at work. Anyone 50 or older by December 31st can put away an additional $7,500 for a total of $30,000. Contributing to a 401(k) or 403(b) plan at work is one of the best tax shelters available to you during your working years.
  1. If you’re self-employed, consider setting up a Solo 401(k). A Solo 401(k) plan lets a self-employed person hit the $66k retirement plan max with less income than a SEP IRA, and allows a self-employed person aged 50 or older to put away $73.5K for 2023 versus $66k into a SEP IRA. Solo 401k’s are also Roth Conversion friendly by accepting rollovers of tax-deferred income from your current IRAs. 
  1. Take a look at your withholdings and instruct your employer to withhold additional taxes to avoid getting hit with an underpayment penalty if you haven’t had enough taxes withheld during the year. (Take a look at the IRS’ Withholding Calculator to set your withholdings for 2024.) 
  1. Consider selling your investments held in non-retirement accounts that have decreased in value since your capital losses can offset other capital gains realized during the year (including capital gain distributions from your mutual funds). Excess losses can then be used to offset up to $3,000 of wages and other income while any remaining losses get carried over to next year. Make sure to wait at least 31 days before buying back a security sold at a loss, or the IRS will disallow the loss under the “wash sale” rules. Please note that wash sale rules currently don’t apply to crypto losses. 
  1. Consider selling your investments held more than one year that have increased in value if you are in the two lowest tax brackets since the long-term capital gains rate for you will be 0%. You can then buy back those securities, and the “cost-basis” will be the higher amount. Wash sale rules don’t apply to securities sold at a gain. This strategy will save you taxes down the road when you sell these securities. Just make sure that the capital gains realized don’t push you out of the 22% tax bracket since you’ll be taxed on those long-term capital gains that fall outside that bracket at 22%. 
  1. Send in your January 2023 mortgage payment early enough so it will be processed prior to 12/31/23. By sending in your payment a few weeks early, you can deduct the interest portion of that payment a full year earlier if you will be itemizing your deductions. 
  1. Clean out your closets and donate your clothing and household items to a charitable organization, since “non-cash” contributions are deductible if you itemize. Don’t forget to get a receipt. And you should make a list of each item donated, along with its condition, and snap a few photos as well. Remember, only donations of clothing and household items in “good condition or better” qualify for a deduction. 
  1. For gifts of money, making your donation by credit card before December 31st allows you to deduct the donation on this year’s return, even if you don’t pay your credit card bill until 2024. And you always have the option of donating appreciated investments to charities or a Donor Advised Fund. You get to claim your donation based on the value of the assets donated without paying any capital gains taxes on the appreciation. (Use this IRS tool to confirm a charity as legitimate.) Don’t donate investments that have decreased in value. Instead, sell them first, take the loss on your taxes, and donate the money received from the sale. Learn more about Managing Your Charitable Donations. 
  1. Pre-pay your projected state tax shortfall if you’ll be itemizing your deductions and will have less than $10k in state income taxes and real estate taxes combined. Practice owners operating in Massachusetts and many other states as S-Corps and Partnerships can now get around the $10k max and pay their personal Mass taxes on the flow-through profit as a deductible expense to the practice known as the Entity Level Tax. 
  1. Pre-pay and pay off your medical bills if your total allowable medical expenses exceed 7.5% of your income and you itemize.  If you have a qualifying high deductible health insurance plan in place, max out your 2023 Health Saving Account at $3,850 if single or $7,750 for families by 4/15/24. Anyone 55 or older can add $1k to their H.S.A.s.

 Practice owners should begin by finalizing their plans to replenish supplies and pay outstanding bills by 12/31, purchase and install equipment and technology by 12/31, and figure out the maximum retirement plan contribution allowable that makes the most long-term financial sense.

Lastly, as a bonus year-end planning tip, don’t forget that you have 180 days from the date you realize a capital gain to invest up to the full amount of the capital gain into an Opportunity Zone fund and defer paying income taxes on your realized gain until that investment is sold.

And, as always, evaluate whether you’ll save any taxes by postponing 2023 income or deductions into 2024 or by accelerating 2024 income or deductions into 2023. Don’t forget that the Massachusetts millionaire’s tax started 1/1/23, so successful practice owners with income greater than $1M per year should incorporate that new tax in their planning.