As the end of the year approaches, it can be easy to get swept away with holiday happenings and just the general busyness of life. But it’s important to remember that December 31 is a key deadline for many financial actions. Here are ten smart money moves to make before the end of the year that will help you save money – on taxes or in other ways. Add them to your to-do list and reach out if you have questions or could use some help.
1. Flexible Spending Accounts (FSA)
End of Year Money Move: Reimburse yourself before they expire
FSAs are use-it-or-lose-it accounts. They’re a great way to save taxes on your healthcare and childcare costs, as long as you use them up before the end of the year. Most accounts allow for a small carryover of funds or a short grace period for reimbursement into 2024, but not all do. Your best bet is just to reimburse yourself fully from your account(s) before the end of the year.
Wherever you can, ask for a consolidated statement from your providers to get all of your expenses on one receipt. Most daycare providers do this automatically. You can ask for one from mental health practitioners too. You’ll need to specify the dates of service and likely the provider’s tax ID number, so be sure they include those on the receipt.
2. Retirement Accounts (401k, 403b, 457b)
End of Year Money Move: Max your contributions and don’t over-contribute
Make sure you’re on track to contribute the amount you planned into your workplace retirement account, like a 401k or 403b. For many people that means maxing out your contributions, or at least taking full advantage of your employer match. If you’ve had more than one employer in the year though, it could mean making sure you’re not over-contributing, which can cause problems on your tax return and trigger excess taxes.
The 401k/403b employee contribution limit for 2023 is $22,500 for people 49 and under, plus a $7,500 catch up contribution for those 50 and above. Check your most recent paystub to find the total amount you’ve contributed year-to-date. Add to that the amount that will be contributed with each remaining paycheck this year, plus any amounts that you’ve contributed through another employer. If it looks like you’ll miss your target, login to your account online or contact your HR department ASAP to change your contribution amount for the final paycheck of the year to correct it.
3. 529 College Savings Plans
End of Year Money Move: Optimize your state tax benefit
Some states offer a tax deduction for 529 college savings plan contributions made within the calendar year. If you live in one of those states, get your contributions in by December 31 to take full advantage of the deduction. Every state has different rules for who can take a tax deduction, what plans qualify, and how much of a deduction you can receive.
While the state tax deduction is great, the biggest benefits of using a 529 plan are actually the tax-free growth and withdrawals when used for education. So even if your state doesn’t offer a deduction, it can still be worthwhile to consider a 529 plan if you anticipate higher education expenses in your future.
To learn the specific rules for your state and decide whether a 529 plan is right for your family, check out the website for the 529 plan administered by your state or talk to a financial planner knowledgeable about 529 plans.
4. Charitable Contributions
End of Year Money Move: Consider ways to maximize your tax deduction
As your stuffed mailbox probably shows, nonprofit organizations will be the first to remind you to get your charitable contributions in before the end of the year to qualify for potential tax deductions. With our current tax laws though, many people aren’t getting the full tax benefit of charitable deductions that they used to.
It’s still just as important as ever to give generously. If you want your tax deduction to go even farther, bunching two years-worth of charitable contributions into one year may help. If you do this through a Donor Advised Fund (DAF), you can front-load the tax deduction and then spread out the payments to nonprofits over the full two-year period. Or you can give directly to nonprofits and let them decide how to allocate the larger lump sum.
For additional tax benefits, if you have investments in a taxable brokerage account, consider donating appreciated shares instead of cash. Neither you nor the charity will owe taxes on the gain, so it’s a win-win for all.
5. Inherited IRAs
End of Year Money Move: Take out what is required, or more if that’s optimal
If you inherited an IRA from someone, you may need to take out a required minimum distribution (RMD) before the end of the year. The rules can get pretty complicated based on when the original IRA owner passed away, what their relation to you was, and whether they had started taking RMDs. And even if you’re not required to take money out this year, in some cases it might be a good idea to do so.
If you have an inherited IRA, it’s best to get personalized guidance from a tax-savvy financial planner to understand what’s required and optimal for you.
6. Student Loan Consolidation
End of Year Money Move: Qualify to get closer to loan forgiveness
If you’re on an income-driven repayment (IDR) plan or working toward Public Service Loan Forgiveness (PSLF), there were a bunch of reasons in the past why some months may not have been credited toward loan forgiveness – periods of forbearance, deferment, or being on the wrong repayment plan, for instance. The Department of Ed is implementing a one-time adjustment to potentially credit additional months toward loan forgiveness. For people with Direct Loans or Federal Family Education Loan (FFEL) Program loans held by the US Department of Education this will happen automatically, which is great.
People who have commercially held FFEL loans or Perkins loans can also benefit, but they have to consolidate into Direct Loans by December 31, 2023 in order to be eligible for this one-time IDR payment count adjustment. If this applies to you, go to the Federal Student Aid website to complete a Direct Consolidation Loan application
7. Business Income and Expenses
End of Year Money Move: Consider timing for possible tax benefits
Small business owners may be able to save on taxes by adjusting the timing of income and expenses around year-end. For instance, if 2023 was a particularly profitable year that might bump you into a higher tax bracket, you could consider waiting to send late-December invoices until January and pre-paying some expenses in December instead of next year, even with a credit card that you don’t pay off until next month.
This strategy is only really a possibility for business owners who use a cash method for accounting, and it’s best to talk to a tax professional to understand the specifics for your situation.
8. Tax Loss Harvesting
End of Year Money Move: Lock in tax losses to offset future gains
Explaining tax loss harvesting (TLH) is an entire article in and of itself, so stay tuned for another blog post about what TLH is and how it works. In a nutshell, it’s a way to lock in tax losses that can be used to offset current or future capital gains taxes on the sale of your investments. Up to $3000 of capital losses can also be used to offset income tax on employment earnings, which is a nice benefit for high earners in the top tax brackets.
If you’re already familiar with the strategy, or are working with a financial planner who is, it can be beneficial to look at your taxable investment portfolio before the end of the year to take advantage of any losses that are available. Tax loss harvesting is something to think about throughout the year – not only in December, but if you want to make use of them this year, there are only a few weeks left to take advantage of this smart money move.
9. Roth Conversions
End of Year Money Move: Pay taxes now to save big on taxes later
Did you finish a medical fellowship in 2023, cut back at work to take care of a new baby, semi-retire, or take a sabbatical? If it was a particularly low-income year and your income is likely to be higher in future years, now might be a great time to consider doing a Roth conversion.
A Roth conversion involves taking money out of a traditional IRA, paying tax on the distribution, and putting it right back into a Roth IRA, where your money can grow and will never be subject to income tax again. It’s an optimal strategy for years when you’re in a lower tax bracket than you might be later when you’re required to take the money out of your IRA.
This is a multi-year advanced tax planning strategy. It’s very helpful to work with a financial planner knowledgeable in this area so they can identify the ideal amount you can convert and model out the tax savings over time.
10. Long Term Care Insurance
End of Year Money Move: Consider getting coverage before your state imposes a tax
Multiple states are considering adding a new payroll tax to generate revenue for a public long term care benefit. Washington state set the precedent in 2019 and similar proposals are in various stages of discussion in nineteen states, including New York, California, Minnesota, Michigan, and Illinois. Washington’s tax rate is an uncapped 0.58% of wages, so if you’re a relatively young, healthy, high-earner, the payroll tax might be more than the cost of buying a private long term care insurance policy for yourself.
With the silver tsunami we’re facing as the Baby Boomers age, there will be an increased demand for long term care and a lack of adequate state resources to cover it, so initiatives like this are certainly needed for the public good. You could consider your additional tax payment a contribution to our collective society.
If you’d prefer to be exempt from the additional tax by securing your own policy, that might be possible. The tricky thing is that states are considering language stating that the private LTC policy would need to be in place on January 1st of the year the bill is passed. So if your state passes a bill in 2024, you’d need to have secured a policy by the end of this year.
I don’t have any insider information to know what the final details of these laws will be or when they will pass. I also don’t sell insurance or have any vested interest in encouraging anyone to buy it. While there is word that the sponsoring senator in NY plans to reintroduce the bill in 2024, you could scramble to put a policy in place and the bill might not pass next year. Take this tip as purely informative and make the decision that’s right for you.
Whatever money moves you make before the end of this year, I wish you a New Year filled with health, joy, and fulfillment.
Kathryn Kubiak-Rizzone, CFP®, CSRIC®, is the founder of About Time Financial Planning, LLC, a fee-only financial planning firm on native Haudenosaunee land in Rochester, NY, serving clients virtually across the US. She helps early- and mid-career professionals and specializes in women physicians, small business owners, and LGBTQ+ families. At About Time, we give people an affirming space to talk about money and the support they need to make empowered money decisions so they can reach financial freedom and live their fullest lives.
