As the year draws to a close, it’s the perfect time to evaluate your financial health and explore ways to maximize tax deductions and savings. With strategic planning and informed decision-making, you can significantly reduce your tax burden and step confidently into the new year. In this blog post, we will delve into essential year-end tax tips, revealing savvy strategies and little-known deductions that can help keep more of your hard-earned money in your pocket.

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Look for Tax Deductions

Your income alone doesn’t paint the full picture of your tax liability. There are many different factors that can increase––or even decrease––the amount you owe. Don’t miss out on these common tax deductions and credits. 

Charitable Contributions

Many people are aware that donations to charity count as tax deductions, but did you know you can potentially deduct up to 60% of your adjusted gross income (AGI)? That’s right. If you have an AGI of $100,000, for example, and you donate $10,000 to charity, you can deduct $10,000 come tax time since it’s less than 60% of your AGI. This drops your taxable income from $100,000 to $90,000. 

Keep these points in mind when considering charitable deductions:

  • Cash Donations: Donations made by cash, check, or card to qualified charities can be deductible. The IRS has specific guidelines on which organizations qualify, typically excluding political organizations and social clubs.
  • Non-Cash Donations: Money isn’t the only thing that counts as a charitable contribution. Donations of clothing, furniture, and other goods to organizations like Goodwill can also be deducted. Be sure to keep the receipts for these items to include on your tax forms.
  • End-of-Year Strategy: Consider donating appreciated stocks or other assets instead of cash. That way, you can avoid capital gains taxes on the asset’s growth while receiving a charitable deduction for its fair market value.

As you can see, while donating to charity can be a reward in and of itself, it’s also beneficial come tax season. Don’t let these potential deductions slip by.

Medical and Dental Expenses

Medical and dental expenses can be deducted if they exceed 7.5% of your AGI. Eligible deductions include amounts paid to dental or medical professionals, payments for prescription drugs, and more. Expenses that are not traditionally covered under medical deductions include costs such as employer-paid premiums and cosmetic surgeries.

Student Loan Interest Tax Deductions

Student loans are a fact of life for many. The good news is that by paying interest on them, you can qualify for a deduction. Note that deductions phase out if your income reaches a certain limit. For 2023, that limit was between $75,000 and $90,000, or $155,000 and $185,000 for those that filed jointly. 

Educational Expenses

In addition to student loan interest, you may qualify for tax deductions based on other educational expenses. There are two main tax credits to help offset the costs:

  • The American Opportunity Credit: This credit is available to eligible students in their first four years of post-secondary education and can be claimed for up to $2,500 per year per student. It covers expenses like tuition and course materials.
  • The Lifetime Learning Credit: The Lifetime Learning Credit offers up to $2,000 per year and is available to both undergraduate and graduate students. 

Even if you’re a student with limited income, you should still file a tax return in order to receive these benefits.

Optimize Retirement Contributions

Contributing to retirement accounts such as a 401(k) or IRA before the end of the year can not only bolster your retirement savings but also reduce your taxable income. Here’s how.

Tax Deduction for 401(k) Contributions 

Contributing to a traditional 401(k) plan defers part of your salary into retirement savings, thereby lowering your taxable income. As a result, you may qualify for additional tax deductions or credits. If so, this can lower your tax bracket and save you even more. Remember, too, that the contributions you make to a 401(k) are tax-deferred until retirement, meaning you won’t owe taxes on the money until withdrawal, allowing funds to compound without immediate tax implications.

IRA Contributions

You can also reduce your tax burden by contributing to an Individual Retirement Account, or IRA. Traditional IRA contributions are tax-deductible if you meet certain income requirements. For example, for tax year 2023, those making $73,000 or less could make a full deduction up to the lesser of $6,500 of their taxable compensation. Those making $83,000 or more were ineligible for IRA deductions. Roth IRA contributions aren’t tax-deductible but offer tax-free withdrawals in retirement. 

Review Your Investment Portfolio

Tax-loss harvesting is a strategic method to reduce taxes by selling investments that have lost value, offsetting capital gains. While reviewing your investments, identify underperforming assets to sell before the year’s end. Balance gains and losses to minimize net taxable gains, and consider speaking with a financial advisor to craft a strategic approach. 

Keep More Money in Your Pocket With These Strategies

As we look to the new year, it’s important to start thinking about taxes. Remember to stay informed about tax law changes and consult with a tax professional to tailor strategies to your unique financial situation. Taking these proactive steps can lead to substantial savings, allowing you to invest more in the things that matter most. 

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