Tax season officially starts early next year, but there are a lot of tax-savings steps that must be taken by Dec. 31.
Some of the most lucrative ones come courtesy of the Inflation Reduction Act, which offers beefed up tax credits to upgrade the energy efficiency of your home and for car buyers to electrify their vehicles. Other ones include the usual deductions for charitable donations, 401(k) funding and securities losses. If you’re a senior, you’ll also need to know the required minimum distribution (RMD) rules, which changed with Secure Act 2.0, or face steep penalties.
This may all sound complicated and time consuming, especially with busy yearend holiday activities in the mix. So, we’ll break it down here for you so you can move quickly to take advantage of as many tax-savings moves as you can before time runs out.
Improvements that may qualify for a tax credit include:
Home clean electricity products
Heating, cooling, and water heating
Other energy efficiency upgrades
The amount of credit you can take is typically 30% of the total improvement expenses in the year of installation. Some items are capped, though, up to a certain dollar amount each year but have no lifetime limits, meaning you can spread out your home improvements and claim the maximum credit each year. For details, check the Department of Energy’s website.
To claim the credit, file IRS Form 5695 with your tax return and receipts.
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If you’re still looking for a car for personal use in the U.S., buy and take delivery of a new plug-in electric vehicle (EV) or fuel cell vehicle (FCV) by year end, you may qualify for a clean vehicle tax credit of up to $7,500.
Your adjusted gross income either this year or last year must be below the following thresholds to qualify:
The seller also must give you information about your vehicle's qualifications and register online and report the same information to the IRS. If they don't, your vehicle won't be eligible for credit, the IRS warns.
To claim your credit, file Form 8936, Qualified Plug-in Electric Drive Motor Vehicle Credit (Including Qualified Two-Wheeled Plug-in Electric Vehicles) with your tax return and provide your vehicle's identification number.
Top off your company’s 401(k) if you haven’t already because those your contributions are tax deductible unless it’s in a Roth 401(k). A Roth 401(k) is funded with post-tax dollars, so your withdrawals are tax-free later.
Contribution caps are $22,500 for employees or $30,000 if you’re over 50 years old. If your company matches, total combined employee and company contributions can’t exceed $66,000.
Can’t make the maximum contribution to your 401(k)? Try at least to contribute the amount your employer is willing to match. You can also deduct your employer’s contributions.
If you itemize your taxes − usually when you expect deductions, including charitable gifts, add up to more than the standard deduction – consider maximizing donations to IRS-qualified organizations.
You can generally deduct up to 60% of your adjusted gross income. Provided you've held them for more than a year, appreciated assets including long-term appreciated stocks and property are generally deductible at fair market value, up to 30% of your adjusted gross income.
If you’re not sure yet which organizations you want to donate to, you can set up a donor-advised fund (DAF), put your money into that, take the tax deduction and decide later how you want to disburse the funds. Just make sure all the paperwork is done correctly to claim your deduction.
“The DAF has to send a letter to acknowledge the donation, describing the asset and value, by year end,” said Ryan Losi, executive vice president at certified public accounting firm PIASCIK.
Check your portfolio to take advantage of tax-loss harvesting, which is when you sell an asset at a loss to offset taxable capital gains and potentially offset up to $3,000 of your ordinary income.
You’ll still have $2,000 of losses left that you can use against gains or income next year.
A couple of RMD rule changes since 2020 have left many seniors confused about whether they must take RMDs from your taxable retirement accounts this year, tax experts say. And this is one, you don’t want to get wrong because “penalties are pretty severe,” notes Mark Steber, chief tax information officer at tax preparer Jackson Hewitt.
If an account owner fails to withdraw the full amount of the RMD by the due date, the amount not withdrawn is subject to a 25% excise tax, or possibly 10% if the RMD is corrected within two years, the IRS said. You can ask for the penalty be waived if you have a “reasonable” excuse and are remedying the problem.
To make it easy and avoid penalties, know when you turned 72 years old, Losi said.
“If you didn’t take one in April, then file for relief,” Losi said. Because of the confusion, “the IRS will be lenient.”
RMDs are taxed as ordinary income for the tax year in which they are taken but if you’re at least 70-½ years old, you can avoid the tax by donating money directly from your individual retirement account (IRA) to a charity. In 2023, you can donate up to $100,000 as a qualified charitable distribution. You won't receive a tax deduction for the donation, but the gifted amount can be used to satisfy all or part of your RMD without adding to your taxable income.
“The worst thing you could do is if you take the standard deduction, take $5,000 from your IRA, pay the taxes and then write a $5,000 check to your church or whatever and get no benefit,” Steber said.
Medora Lee is a money, markets, and personal finance reporter at USA TODAY. You can reach her at [email protected] and subscribe to our free Daily Money newsletter for personal finance tips and business news every Monday through Friday.
