If your investments grew this year and you recognized gains, you may be able to lower your tax bill by implementing a tax-loss harvesting strategy. Tax-loss harvesting requires you to sell securities at a value less than their cost basis to create a loss, and these losses can then be used to offset recognized capital gains. Using this strategy, taxpayers may also be able to deduct up to $3,000 of any remaining losses to offset ordinary income each year and carry additional losses into future years. 

With the potential for volatility in the market, harvesting capital losses should not be limited to the end of the year. Instead, consider reviewing with your advisor throughout the year, which may help you take advantage of market swings, avoid wash sale situations (the purchase of a “substantially identical” security within 30 days), understand the impact on dividend distributions and transaction fees, and make sure it works with your overall strategy.

Be sure to work closely with your tax advisor as well regarding how tax-loss harvesting could impact your tax situation.

If you expect to realize capital gains in 2023 due to investment transactions or a sale of other assets, such as a business or real estate, consider implementing a charitable giving strategy to help reduce your tax bill. If you are certain that you want to benefit charity yet are uncertain which charitable organizations you wish to benefit, a donor-advised fund is a flexible option. With a donor-advised fund, you get the benefit of the immediate tax deduction, but grants from the fund do not need to be made this year. It is important to review your charitable giving plan to ensure that you receive any available charitable deductions in the desired tax year. Your tax and other financial advisors can outline strategies to consider.

If you are owed a tax refund, it means that you paid more taxes during the year than you owed. Since you will not receive any interest on this money from Uncle Sam when it comes back to you, consider reviewing your W-4 to adjust the amount of withholding tax from each paycheck, which will have the effect of increasing your paychecks throughout the year.

On the flip side, if you owe taxes at the end of the year, it simply means that you did not have enough withheld from your earnings over the course of the year. This can happen if your employer does not withhold enough from your paychecks based on the information you provided on your W-4, or if you did not properly make quarterly estimated tax payments to the IRS.

While you can change your W-4 any time, a good rule of thumb is to review your withholdings at your employer’s open enrollment, which is usually in the fall. Be sure to update your W-4 if there is a change in your tax filing status, such as from single to married, or adding a dependent.

A health savings account (HSA) is a type of tax-advantaged account for individuals who are eligible for high-deductible medical plans. Contributions to HSAs are fully deductible from taxable income, grow tax-deferred within the account, and are not taxable so long as the money is used for qualified healthcare expenses. For 2023, HSA contribution limits are $3,850 for individuals and $7,750 for families. Individuals aged 55 and older can make a $1,000 annual catch-up contribution. There’s only upside to this, so if you can afford it, maximize it!

Bunching is a strategy in which you alternate between taking the standard deduction in one year and itemizing your deductions in the next year. By making certain donations or payments, such as charitable or medical, in a particular year in order to exceed the standard deduction threshold, you can increase the likelihood of being able to itemize deductions and receive a tax benefit for these payments.

For example, if you make donations to a particular charity every year, you can make your normal contributions during the year but then prepay the entire subsequent year’s contribution in a lump sum in December of the current year. So essentially, you’re paying two years’ worth of deductions in a single tax year and have no charitable deductions in the next year.

In certain circumstances, gifting an asset that has appreciated in value may be advantageous because you may be able to eliminate the capital gains tax that otherwise would have been owed if the asset had been sold and the net sale proceeds donated to the charity. Ultimately, this means that you save on taxes and the charity receives more. Since December 31 is the deadline for completion of gifts, it is advisable to start the process earlier in the year.

Traditional IRAs, 401(k)s, 403(b)s, and 457(b)s accounts allow for a dollar-for-dollar reduction of taxable income for contributions made. Once contributions are made to these types of accounts, the asset can grow tax-deferred over time. Contributions can be made any time between January 1, 2023, and April 15, 2024, for your 2023 taxes. When distributions are made at retirement, income is payable on the distribution amount.

By contrast, Roth IRA and Roth 401(k) contributions don’t provide taxable income reduction up front but do allow for tax-free growth and tax-free qualified distributions.* The contribution limits in 2023 are $6,500 for IRAs and $22,500 for 401(k)s. Individuals aged 50 and older can make annual catch-up contributions of $1,000 to an IRA and $7,500 to 401(k), 403(b), and 457(b) plans.

Read more about IRAs.

*Qualified distributions are tax-free. Distributions are qualified after five years and you are at least age 59½, or as a result of death, disability, using the first-time homebuyer exception, or taken by your beneficiaries due to your death.

Deductions can reduce the amount of income that is subject to income tax. Some expenses paid during the year, like mortgage interest, can be deducted as itemized deductions. Charitable contributions and medical expenses can also be included as itemized deductions. Due to tax law changes in recent years, it is generally advantageous for most taxpayers to take the standard deduction. The standard deduction amount for 2023 is $13,850 for single taxpayers and $27,700 for taxpayers who are married filing jointly.

Comparing total itemized deductions available to the applicable standard deduction is a good way to ensure that you are minimizing the income tax that you’re responsible for. 

Credits can be even more valuable than deductions because they reduce the amount of taxes due dollar for dollar. There are a variety of different credits that may be available depending on your situation. Reflect upon any major life events that occurred in 2023, such as getting married, expanding your family through birth or adoption, funding education or retirement, paying for child or dependent, incurring significant medical costs, or even home improvements or a new car – these changes may come with a tax benefit.

The following is a non-exhaustive list of credits that may be available depending on your personal and financial circumstances. Be sure to confirm with your tax advisor if you can take advantage of any credit to reduce your tax obligation.

• Earned Income Tax Credit — For eligible families below certain income limits, which for 2023 ranges from $600 to $7,430.

• Child Tax Credit — The maximum credit for 2023 is $2,000 per child up to age 16.

• Child and Dependent Care Credit — For up to $3,000 of qualifying expenses for one qualifying child or dependent and up to $6,000 of qualifying expenses for two or more. 

• Retirement Saver’s Credit — Taxpayers may be eligible for up to $1,000 ($2,000 for joint filers) in a government “matching” tax credit, which helps earners below certain income limits save more in a 401(k), Achieving a Better Life Experience (ABLE) account, or IRA. 

• American Opportunity Tax Credit (AOTC) and Lifetime Learning Credit (LLC) — Designed to help with the cost of higher education, the AOTC is up to $2,500 per eligible student; the LLC is up to $2,000 per tax return. Both credits can be claimed on the same return, but not for the same student or the same qualified expenses. 

• Premium Tax Credit — If you purchased health insurance through one of the exchanges created by the Affordable Care Act, you may qualify for this tax credit to lower health insurance costs. 

• Residential Clean Energy Credit — If you are a homeowner who invested in energy efficient upgrades to your home, you may qualify for a credit equal to a percentage of the upgrade’s cost.

• Electric Vehicle Credit — If you bought a new, qualified plug-in vehicle (EV) in 2023 or before, you may be eligible for up to $7,500.