I can’t believe it is the last quarter of 2023 already.
As the end of the year approaches, many doctors are busy with patients trying to get in for procedures as deductibles get met. It’s also a crucial time to consider what’s going to happen when you file your taxes in 2024.
Making strategic investments before the year’s end can significantly reduce your tax liability and potentially increase your wealth in the long run.
Here are some key things to think about.
Maximize retirement contributions
Contributing to retirement accounts is one of the most effective ways to reduce your taxable income while securing your financial future. Two popular options for individuals are the 401(k) and IRA (Individual Retirement Account).
401(k): If your employer offers a 401(k) plan, consider maxing out your contributions. For 2023, the contribution limit is $20,500 for individuals under 50 and $27,000 for those 50 and older. Contributions to a traditional 401(k) are tax-deductible, meaning they lower your taxable income.
IRA: If you don’t have access to a 401(k) or want to supplement your retirement savings, an IRA is an excellent choice. For 2023, the annual contribution limit is $6,000 ($7,000 for individuals aged 50 and older). Traditional IRA contributions are also tax-deductible, subject to income limits.
Consider tax-efficient investments
Tax-efficient investments can help you minimize the tax impact of your investment gains. Here are two options to consider:
Municipal bonds: Municipal bonds (munis) are issued by state and local governments and offer tax-free interest income. While the yields may be lower compared to taxable bonds, the tax benefits can make them a wise choice, especially for high-income individuals.
Tax efficient Funds: Invest in tax-efficient mutual funds or exchange-traded funds (ETFs) that generate fewer capital gains distributions. These funds are designed to minimize taxable events, helping you keep more of your returns.
Harvest capital losses
Tax-loss harvesting is a strategy where you sell investments that have declined in value to offset gains in other investments, thus reducing your overall tax liability. Be sure to consult with a financial advisor or tax professional to navigate the complexities of tax-loss harvesting effectively.
Health savings account (HSA)
If you have a high-deductible health plan (HDHP), consider contributing to an HSA. HSA contributions are tax-deductible, and withdrawals for qualified medical expenses are tax-free. Plus, any unused funds can be invested and grow tax-free for future medical expenses, making it a powerful long-term savings tool.
Invest in tax-advantaged education accounts.
If you have children or plan to pursue further education yourself, consider contributing to tax-advantaged education accounts like 529 plans or Coverdell ESAs. These accounts offer tax benefits while saving for educational expenses, which can be a substantial financial burden.
Contributions to qualified charities can provide you with a deduction that reduces your taxable income. Additionally, consider donating appreciated assets like stocks, as this may allow you to avoid capital gains taxes while supporting a cause you care about.
Start a small business.
If you have entrepreneurial aspirations or already own a side business, you may be able to take advantage of various tax deductions and credits. Consult with a tax advisor to explore the tax benefits associated with your specific business endeavors.
Review your investment portfolio.
Before the year ends, conduct a thorough review of your investment portfolio. Consider rebalancing it to align with your long-term financial goals and risk tolerance. This can help you optimize your investments for the year ahead while potentially reducing tax implications.
Tax laws and regulations can be complex, so it’s crucial to consult with a certified financial planner or tax professional who can provide personalized guidance based on your unique financial situation and goals.
You can set yourself up with a lower tax burden when you file in April 2024 by taking a few proactive steps now.
Amarish Dave is a board-certified neurologist with over 20 years of experience in both neurology and active stock investing. In addition to his medical career, he holds a background in business from the University of Michigan and has successfully passed the SIE exam administered by FINRA. Dr. Dave is founder, FiscalhealthMD.com, a website dedicated to educating doctors at all stages of their careers, ranging from residents to retirement, about financial planning.