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MONTHLY INSIGHTS – DECEMBER 2023
Edelman Financial Engines
November 30, 2023


5 STRATEGIES FOR LOWERING YOUR TAXES

DON’T WAIT UNTIL IT’S TOO LATE TO CONSIDER THESE TAX-REDUCTION STRATEGIES.

 Many people are unaware that there are steps they can take to proactively
reduce their tax burden, steps which could save you a bundle off your total bill
– thereby freeing up money to help drive other financial goals, such as saving
for retirement or paying off debt. There’s just one catch. While these
tax-saving strategies can be implemented any time of year, some must be
completed by Dec. 31.

Read on to learn five tax-saving strategies you can consider before the year’s
end to potentially reduce your taxable income. You can implement these same
strategies next year, once you figure out what works for you. Just be sure to
consult your tax advisor before making any final decisions.

1. CONTRIBUTE THE MAXIMUM TO WORKPLACE RETIREMENT PLANS AND IRAS

Maxing out your retirement plan is one way to reduce your taxable income because
the money may be tax deductible. (The exception is Roth 401k and Roth IRA
contributions, which aren’t.) The following are the 2023 contribution limits for
the most common retirement plans. Regardless of which plan you have, try to
contribute as much as you can:

 * For 401k, 403b, most 457 plans and the federal government’s Thrift Savings
   Plan, the 2023 contribution limit is $22,500. If you’re over 50, you can
   contribute an additional $7,500 in catch-up funds for a total of $30,000.
 * If you’re saving for retirement through an IRA, you can contribute $6,500 per
   year. Unless you’re over 50, in which case you can contribute another $1,000
   in catch-up funds for a total of $7,500.
 * The contribution limit for Simplified Incentive Match Plan IRAs is $15,500
   and the catch-up contribution limit is $3,500.

If your 401k plan allows you to contribute after-tax dollars, consider adding
more after-tax dollars to your 401k plan and converting those dollars to a Roth
(when permitted).

2. SMALL-BUSINESS OWNER? SET UP AND FUND A RETIREMENT ACCOUNT.

If you are self-employed, there are several tax-saving strategies you can take
advantage of by establishing a retirement plan for your business. Most commonly,
this will be a solo 401k. A solo 401k is only available for a business with no
employees other than the spouse of the owner.

When you set up a solo 401k, or what the IRS calls a one-participant 401k,
because you are both employer and employee, you can contribute up to $66,000 in
2023, with an additional $7,500 catch-up contribution if you’re 50 or older.
You’ll have a choice of establishing either a traditional or Roth 401k. If you
choose the traditional, your contributions may be tax-deferred, reducing your
taxable income for the year. With either, you’ll need to act before the end of
the year to establish the plan, but they can be funded up until your tax-filing
deadline.

Another option is a Simplified Employee Pension IRA. One advantage of a SEP-IRA
is that it can be created and funded up until the tax-filing deadline, and if
you elect to take a tax extension, you have up until Oct. 15, 2024, to fund it.

3. TAKE ADVANTAGE OF A QUALIFIED CHARITABLE DISTRIBUTION

A QCD is a direct transfer of funds from your IRA to a qualified charity. You
must be at least 70 ½ years old at the time you request a QCD, which can be used
to draw down a high-balance IRA. Amounts distributed as a QCD can be counted
toward satisfying yearly required minimum distributions, up to $100,000
($200,000 for married couples) if the funds are transferred directly from your
IRA custodian to the charity. If you receive a distribution and then give it to
charity, it won’t be counted as a QCD but as taxable income. Both traditional
and inherited IRAs are eligible for QCDs.

4. CONSIDER DONOR-ADVISED FUNDS

A DAF is an account in which you deposit assets for a donation to charity over
time. The advantage over direct giving? Let’s say you have appreciated stock but
haven’t decided where you want to donate. When you open a DAF, you get an
immediate tax deduction even though you can delay the actual donation for years.
You can donate more complex assets such as real estate, restricted stock or even
cryptocurrencies to your fund and you won’t have to pay capital gains tax. For
2023, you can deduct cash charitable donations up to 60% and noncash
contributions up to 30% of your Adjusted Gross Income.

5. PLAN FOR UNREIMBURSED MEDICAL EXPENSES

Did you know that taxpayers can deduct qualified, unreimbursed medical expenses
that exceed 7.5% of their adjusted gross income? That means if your AGI is
$100,000, anything beyond the first $7,500 of qualified medical bills could be
deductible.

Let’s say you’ve spent (or are close to spending) 7.5% of your income on
qualified medical expenses. If you know you need another procedure, you might
consider scheduling and paying for it this year so that you can deduct it when
you file an itemized tax return in 2024.

Another way to save on taxes is to max out your health savings account. If you
have an HSA, you can contribute a maximum of $3,850 individually if you have a
high-deductible plan or $7,750 if you have a family high-deductible plan in
2023. You’re allowed another $1,000 in catch-up contributions once you reach age
55.

Not sure which of these strategies you can incorporate into your financial
planning? Contact Edelman Financial Engines to see if you would benefit from
working with a financial advisor. Call (855) 224-1379 weekdays from 9 a.m. to 9
p.m. ET to get started.

Material discussed is meant for general illustration and/or informational
purposes only, and it is not to be construed as tax or legal advice. Although
the information has been gathered from sources believed to be reliable, we do
not guarantee its accuracy or completeness.

Neither Edelman Financial Engines, a division of Financial Engines Advisors
L.L.C., nor its affiliates offer tax or legal advice. Interested parties are
strongly encouraged to seek advice from qualified tax and/or legal experts
regarding the best options for your particular circumstances.

© 2023 EDELMAN FINANCIAL ENGINES, LLC. THIS PUBLICATION IS FOR INFORMATIONAL
PURPOSES ONLY AND DOES NOT CONSTITUTE INVESTMENT ADVICE OR AN OFFER TO BUY OR
SELL ANY SECURITY. FUTURE MARKET MOVEMENTS MAY DIFFER SIGNIFICANTLY FROM THE
EXPECTATIONS EXPRESSED HEREIN, AND PAST PERFORMANCE IS NO GUARANTEE OF FUTURE
RESULTS. EDELMAN FINANCIAL ENGINES ASSUMES NO LIABILITY IN CONNECTION WITH THE
USE OF THE INFORMATION AND MAKES NO WARRANTIES AS TO ACCURACY OR COMPLETENESS.
FUTURE RESULTS ARE NOT GUARANTEED BY ANY PARTY. FINANCIAL ENGINES® IS A
TRADEMARK OF EDELMAN FINANCIAL ENGINES, LLC. ADVISORY SERVICES ARE PROVIDED BY
FINANCIAL ENGINES ADVISORS L.L.C. (FEA), A FEDERALLY REGISTERED INVESTMENT
ADVISOR. CERTAIN SERVICES PROVIDED ON AN EDUCATIONAL AND GUIDANCE BASIS ONLY.
CALL (800) 601-5957 FOR A COPY OF OUR PRIVACY NOTICE.

INVESTING STRATEGIES, SUCH AS ASSET ALLOCATION, DIVERSIFICATION OR REBALANCING,
DO NOT ENSURE OR GUARANTEE BETTER PERFORMANCE AND CANNOT ELIMINATE THE RISK OF
INVESTMENT LOSSES. ALL INVESTMENTS HAVE INHERENT RISKS, INCLUDING LOSS OF
PRINCIPAL. THERE ARE NO GUARANTEES THAT A PORTFOLIO EMPLOYING THESE OR ANY OTHER
STRATEGY WILL OUTPERFORM A PORTFOLIO THAT DOES NOT ENGAGE IN SUCH STRATEGIES.
PAST PERFORMANCE DOES NOT GUARANTEE FUTURE RESULTS.

AM3222461

 

 


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