5 Ways to Gift Yourself Tax Savings This Holiday Season
The Illinois CPA Society offers five money moves to create tax-time savings now and in the year ahead.
Source: CPA Advisor
The hustle and bustle of the holiday season is upon us, and while you’re likely busy hunting for the perfect gifts for your loved ones, don’t forget that you can gift yourself something too—a tax break. With the end of the year quickly approaching, now’s the time to make important year-end money moves that could gift you a smaller tax bill, bigger tax refund, or a better overall financial position in the year ahead. Here are five tax-savvy money moves to make now.
1. Get Your Gifts Ready: If you’re feeling generous with your wealth and would like to pass some of it on to a loved one or other beneficiary, you can gift up to $17,000 (or $34,000 for married couples filing a joint tax return) without triggering a gift tax or reducing your lifetime gift and estate tax exemption.
If you wish to make charitable gifts in sums that warrant itemizing your deductions, cash donations to qualified charities can generally be deducted from taxable income (up to 60% of adjusted gross income [AGI]). Donating appreciated long-term investments can also be a generous but tax-savvy move, as you don’t have to recognize the capital gains and you can take a tax deduction equal to the full fair market value of the donation (up to 30% of AGI). It’s best to check with your broker for the final date they’ll be able to process your gift.
A qualified charitable distribution (QCD) could also be considered if you need to take required minimum distributions (RMDs) from your retirement accounts. For 2023, you can donate up to $100,000 to a charity directly from your IRA using a QCD. While there’s no tax deduction for the donation, the gifted amount can be used to satisfy all or part of your annual RMD without increasing your taxable income.
2. Revisit Your Retirement Savings: Now is an ideal time to see if you’re on track for maximizing your retirement savings for the year. Contributions to tax-deferred retirement accounts—like your employer’s 401(k) or 403(b)—reduce your taxable income, thus lowering your tax bill. The contribution limit in 2023 is $22,500, or $30,000 if you’re age 50 or older. If you contribute to an IRA outside of an employer-sponsored account, the contribution limit to an individual traditional IRA is $6,500, and an additional $1,000 catch-up contribution is allowed if you’re age 50 or over. However, if you or your spouse are covered by an employer retirement plan, contributions to a traditional IRA may not be fully tax-deductible, as deductions phase out depending on income.
You may also want to consider investing in a future tax break. For the 2023 tax year, individuals with an AGI of $138,000 or less ($218,000 for married couples filing a joint tax return), regardless of whether they participate in an employer retirement plan, can contribute up to $6,500 (or $7,500 if age 50 or older) to a Roth IRA. Since contributions to Roth IRAs are made with after-tax money, your investments grow tax free indefinitely. Non-working spouses can also contribute to a Roth IRA as long as the working spouse has earned enough income during the tax year to cover both contributions.
3. Give Your Health Savings Account (HSA) a Check-Up: If eligible, a tax-smart way of setting aside money for qualified medical expenses and lowering your taxable income is to contribute the maximum amount allowed (or the maximum you can manage) to an HSA. HSAs offer several advantages: You pay no federal taxes on your contributions, no federal taxes on investment earnings, and no taxes on withdrawals if the money is used for qualified medical expenses. For 2023, the contribution limit is $3,850 for individuals or $7,750 for families; an additional $1,000 catch-up contribution is allowed if you’re 55 or older.
4. Rethink Where You Park Your Cash: As interest rates have risen, being mindful of the tax consequences of interest-earning savings accounts is important. For a more tax-efficient savings vehicle, consider buying Series I savings bonds issued by the U.S. Treasury. These bonds earn both a fixed rate of interest and a variable rate that tracks inflation. Individuals can purchase up to $10,000 in I bonds electronically per calendar year, and an additional $5,000 in paper I bonds can be purchased when you file your federal tax return. The tax benefit of saving via I bonds is that the interest earned is exempt from state and local taxes (and may even be exempt from all taxes if used for qualified higher education expenses).
5. Harvest Your Investment Losses: Given the stock market’s volatility this year, perhaps you have some investments (i.e., stocks, bonds, mutual funds, etc.) in a taxable account that have declined in value. Selling these investments will realize the losses, which will offset any realized capital gains and reduce your taxable income. Capital losses offset capital gains without limitation, and an additional $3,000 of realized losses can offset other income (losses in excess of $3,000 will be carried forward to the next tax year). Just be aware of the wash sale rule—buying back the same shares of stock or using the proceeds to buy shares of a substantially identical company within 30 days will defer the realized loss.
Questions people ask
How much can I gift without owing gift tax in 2023?
You can give up to $17,000 to any person ($34,000 for married couples filing jointly) in 2023 without triggering gift tax or reducing your lifetime gift and estate tax exemption. Gifts above these limits may require filing a gift tax return and can affect your exemption amount.
What is the IRA contribution limit and who can deduct it?
The 2023 contribution limit for a traditional IRA is $6,500, with an extra $1,000 allowed if you’re 50 or older. If you or your spouse are covered by an employer retirement plan, the deduction may be limited or phased out based on your income. Roth IRA contribution limits and eligibility also depend on your income.
How do HSA contributions help with taxes?
Contributions to a health savings account (HSA) are tax-deductible and investment growth inside the account is tax free. Withdrawals used for qualified medical expenses are tax free as well. For 2023, the HSA contribution limit is $3,850 for individuals and $7,750 for families, with an extra $1,000 allowed if you’re 55 or older.
What are the tax benefits of Series I savings bonds?
Interest from Series I savings bonds is exempt from state and local income tax and may be fully excluded from federal tax if used for qualified higher education expenses. You can buy up to $10,000 electronically each year and an additional $5,000 in paper bonds with your federal tax refund.
How can selling investments at a loss reduce my tax bill?
Realized capital losses can offset capital gains dollar for dollar, and up to $3,000 of losses over gains can offset other income in a year. Excess losses carry forward to future years. Be careful of the wash sale rule, which disallows a loss if you buy back the same or similar investment within 30 days.