It's December! Are you ready for all the decorating and shopping and cooking and parties and tax moves to make? Me neither.
Although I love the holidays and Christmas decorating, my time and patience get shorter this time of year as my seasonal to-do list gets longer. So I understand if you are rolling your eyes right now as I suggest adding some tax moves to your already very long list of holiday tasks.
But some tax actions you take over these last days of 2023 could save you some money. Or help your children continue college. Or make your retirement years more comfortable.
If any of those sound like a perfect personal tax present, then let's get to this year's seven December tax moves.
1. Get in the giving mood. Everyone is well aware that donations to Internal Revenue Service approved 501(c)(3) organizations are tax deductible if you itemize. But giving to family and friends is a good move if you have a substantial estate that could ultimately face the 40 percent federal estate tax.
You can give a specific amount, known as an annual exclusion, in gifts to others. For 2023, that exclusion amount is $17,000 per person. It goes up to $18,000 in 2024.
It's something to think about as the biggest gift-giving day of the year approaches. Most folks are quite happy to get a monetary present of any amount. And there's no tax ramifications for the recipients, whether the gift is more modest or in the five-figure exclusion range.
2. Pay educational costs early. With the next semester of college coming up, consider prepaying that first quarter tuition bill now. Then you can use that amount to claim the American Opportunity Tax Credit.
This credit, which like all tax credits is a dollar-for-dollar reduction of any tax due, is for students in their first four years of undergraduate study. It's worth up to $2,500 for each qualifying student, and is available for prepaid tuition as long as the classes begin next year by the end of March
There are income limits on the American Opportunity credit claim, but even if you make what the tax code considers too much, you might be eligible for a partial tax credit.
Don't forget about your own continuing education. If you're planning to take a class next year to help you do your job better, prepay that amount, too. Then use that amount to claim the Lifetime Learning Credit on your 2023 tax return. As "lifetime" in the credit's name indicates, this tax break isn't limited to undergraduate expenses, and you don't have to be a full-time student.
The Lifetime Learning Credit is worth up to 20 percent of your out-of-pocket costs for tuition, fees, and books, up to a maximum of $2,000. Again, there are income limits, but also partial credit claim options.
3. Bunch tax-related costs. A tax bunching strategy is used by taxpayers who itemize to increase the value of their Schedule A. By pulling some costs into a tax year or, depending on your financial and tax circumstances, pushing them into the next, you can use itemized expenses that otherwise would be wasted.
The most common tactic is bunching medical costs, like opting to have deductible elective surgery by year's end. But bunching also can be used by charity donors.
Bunch contributions to qualifying nonprofits by making two- or three-years' worth of charitable contributions in one tax year. This pushes your itemized claims beyond your standard deduction amount for that year.
Use the standard deduction for the next year or so, then bunch again. It's effectively the tax version of wash, rinse, repeat.
4. Add to your retirement accounts. If you have a 401(k) plan at work, get to your human resources office as soon as possible and up your contribution amount for the rest of the year.
Time, and the number of paychecks to which this applies this year, obviously will limit the effectiveness of this move. But every bit you save now will pay off more when you are ready to tap the plans in your post-work years.
Also add to your IRA, either traditional or Roth. For 2023, the contribution maximum is $6,500 (it goes to $7,000 in 2024). True, you have until April 15, 2024 to do this, but from an earnings perspective, the earlier you start saving for retirement, the better
5. Convert to a Roth IRA. If your year-end IRA review reveals your traditional IRA has decreased in value, it may make sense to convert it to a Roth IRA by the end of the year.
The account's lower value will reduce the tax due on the converted, tax-deferred nest egg money. Plus, future growth in your new Roth IRA is tax free.
Of course, like most tax actions, don't make this IRA move without first evaluating your overall personal finances and tax situation. Some of the conversion considerations are addressed in my post The great traditional IRA to Roth conversion debate.
6. Spend down your FSA. There's no debate on spending medical flexible spending account (FSA) funds. If you have one of these tax-favored workplace plans, now is the time to check that balance.
This workplace healthcare benefit is popular because you fund it with pre-tax dollars each pay period, then use the money to pay a variety of out of pocket medical costs. But there's one drawback. If you don't use all your FSA money, you lose it. More specifically, your boss gets to keep your cash.
For most workers, that use-or-lose spending deadline is Dec. 31. Note, however, that some companies do give FSA owners a grace period until March 15. Others allow a rollover of at least some of the accounts' funds.
But if your workplace's FSA policy is that you must spend it all by year's end, then get to it. Here are some ideas in my post 7 get to spending this month!
7. Assess your estimated tax liability. These extra income tax payments, usually made four times year, are required on earnings that are not subject to withholding. If you underpay, the IRS will slap on interest charges, which went up to 8 percent for the first quarter of 2024.
If your total tax due when you file is $1,000 or more in tax, the interest charge will apply to the amount that's not been paid for the due period. It's also compounded daily, meaning amounts can add up quickly.
Individual taxpayers who have wage income, as well as earnings subject to estimated tax payments, can avoid underpayment penalties by upping their withholding amount for the rest of the year to meet the penalty safe harbor. This also works if your spouse has a salaried job and ups withholding on those earnings that you both report on your jointly filed tax return.
That safe harbor amount is at least 90 percent of your current-year (2023) tax bill or 100 percent of your prior year's (2022) tax bill. This percentage applies to filers with adjusted gross income of $75,000 or less if single, or $150,000 or less for married filing jointly couples. If you make more than those dollar amounts, the 100 percent safe harbor increases to 110 percent.
And speaking of percentages, that 8 percent interest tax underpayment penalty isn't a random rate chosen by the IRS. Rather, the Internal Revenue Code requires the interest rates be determined on a quarterly basis by a specific method. For individual taxpayers, it's calculated as the federal short-term rate plus three percentage points. Inflation has pushed these quarterly rates up over the last couple of years.
More December tax moves: I know, these tax moves look daunting since your December to-do list already if full of holiday tasks. But at least look into those that apply to you. They could be worthwhile tax savings, now or in the future.
For those of you who are more organized and ready to add taxes to your seasonal activities, you can find a few more December tax moves in their usual place, over in the right hand column of the ol' blog.
Give them a look. And if you take relevant tax steps early this month, you'll free up time for more traditional, and fun, festivities.
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