Last-Minute Tax Moves to Make Before the End of the Year

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The end of the year can be a busy time full of holiday gatherings with family and friends. Yet amid the hustle and bustle of December, it’s also important to carve out some space for another important item on your to-do list: tax planning.  

Actions you take before the end of the year could set you up for a smoother tax filing process and save you money in the upcoming spring. Below are five last-minute tax moves you may want to consider.

1. Defer Income

The IRS and your state tax agency will assess taxes based on the income you earn in the year you receive it. So, if you’re able to defer some or all of your December income until the following year, it could reduce your tax liability for the current year.

As an hourly or salaried employee, this option may not be available to you. But if you’re a small business owner (including a freelancer or independent contractor), you might have flexibility in this area — assuming you can afford to postpone receiving a paycheck or disbursement from your business.

Keep in mind that putting off a portion of your income until the following year could also have consequences. For example, it’s important to make sure that earning “extra” income in the upcoming year won’t move you to a higher income tax bracket. Otherwise, you could wind up paying a higher tax rate in the future.

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2. Maximize Retirement Contributions

Another possible way to reduce your taxable income for this year is to increase the amount you’re contributing to tax-advantaged retirement accounts. You fund retirement accounts like a traditional IRA and 401(k) with pre-tax dollars. This means that it may be possible to lower your tax bill by increasing eligible retirement account contributions and writing them off as tax deductions.

If you want to take advantage of the tax benefits that these types of retirement savings accounts have to offer, however, it’s important to understand their rules and restrictions.

• The deadline for 401(k) contributions is December 31
• 401(k) contribution limit for 2023 is $22,500
• IRA contribution limit for 2023 is $6,500

Other restrictions may apply. You can review additional guidelines on the IRS website.

Depending on your tax situation, you may also want to consult with a tax advisor, a financial advisor, or both. The retirement contribution choices you make now can have long-term consequences when it comes to your finances. 

For example, maxing out retirement contributions could help you bump up the potential savings on this year’s taxes. But it also means that you’re deciding not to access that cash until you retire. If you attempt to remove money from an IRA or 401(k) before you’re 59 and ½, you may have to pay an early withdrawal tax thanks to the premature distribution.

Furthermore, you might want to consider investing in a Roth IRA instead of (or in addition to) a traditional IRA. A Roth IRA will not reduce your taxable income this year because you pay taxes upfront before you invest in the account. But it could lower your tax obligations in the future because a Roth IRA isn't taxed when you withdraw funds from your account if you wait until you reach retirement age and have had the account for at least five years. On the other hand, you’ll owe taxes on traditional IRA distributions in the future — both on the money you invested and any growth that may have occurred.

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3. Consider a Roth Conversion

Another move you might want to think about before the end of the year is whether it makes sense to convert a traditional retirement account (e.g., a 401(k) or traditional IRA) to a Roth IRA. A Roth conversion will not reduce your taxable income for this year. In fact, it would have the opposite effect. But a Roth conversion now might save you money when the time for retirement arrives.

When you perform a Roth conversion, you move funds out of a tax-advantaged retirement account. As a result, you’ll have to pay taxes on the money you convert now. But with a Roth IRA, you don’t pay money on your investment (or any growth that may occur) when you withdraw those funds during your future retirement years — at age 59 and ½ or older. If all goes well, that tax-free growth has the potential to save you a lot of money in the long run.

However, it’s wise to consult with a tax professional and financial advisor before you move forward with a Roth conversion. Moving money out of a tax-advantaged retirement account can have an immediate impact on the taxes you owe now. It could affect your tax bracket and tax rate. It could also affect your taxes and retirement savings in the future. So, it’s important to understand the full picture prior to making a final decision.

4. Use Your Flexible Spending Account

A flexible spending account (FSA) is a special type of savings account you can use to pay for eligible healthcare expenses — tax free. You do not pay taxes on the money you add to an FSA, which may lower your federal tax burden for the year — you can contribute up to $3,050 in 2023. You could miss out on an opportunity if you have this benefit and let it go to waste.

If you use an FSA, your employer may contribute up to $3,050 per year to it as well, though they aren’t required to do so. The catch with an FSA is that if you don’t use the tax-free money in your account before the end of the year, you typically lose it.

Rules vary by employer, but it’s common for any leftover cash in your FSA account not to roll over to the next year when January arrives. So, it’s important to use the money to your benefit rather than miss out on this benefit.

If you’re not sure how to use up your FSA money before the end of the year, here are a few ideas for inspiration.

• Dental checkup or procedures
• Vision checkup or supplies (e.g., glasses, contacts, etc.)
• Health screenings
• Mental health support
• Eligible over-the-counter medicine and supplies

5. Contribute to a Health Savings Account

Assuming you already have one, contributing cash to a health savings account (HSA) could be another way to reduce your taxable income before the end of the year. You can use this type of account to save money (pre-tax) to use at a later date for qualified healthcare expenses. As long as you use the cash for eligible medical costs, you won’t owe taxes when you take money out of the account in the future either.

It’s important to note that HSAs only work alongside HSA-eligible health plans. These types of healthcare plans often feature high deductibles. So, you should think carefully about whether this type of healthcare option will work well for your current medical needs.

On a positive note, the funds you contribute in an HSA can roll over from year to year. You can also invest all or a portion of your HSA funds, if desired, to potentially grow your medical savings for the future. Your employer is also allowed to make contributions to your HSA if it desires to do so — like a 401(k) match for your health savings.

Bottom Line

Whether you plan to do your own taxes for the year or hire someone to prepare your tax return on your behalf, it’s smart to set yourself up to save as much money as possible. Of course, all of the year-end strategies above might not apply to your specific tax situation. But it’s still a good idea to consider the list to make sure you’re not missing out on any potential savings opportunities.