Plan Ahead to Help Save on Your Taxes

While tax season may be a few months away, the end of the year is actually a great time to check on your investments. Taking a pause to review your plan now can simplify the next filing season—and potentially save you money.

Increase your tax-deferred contributions

Directing a portion of your earnings into a 401(k) or traditional IRA is a simple way to potentially reduce your annual taxable income. For 2022, the IRS will allow you to contribute a maximum of $20,500 in pretax dollars to a 401(k) plan ($27,000 if you're 50 or older). In 2023, those contribution limits rise to $22,500 and $30,000, respectively. If your employer doesn't offer a 401(k), you can contribute $6,000 in tax-deferred money to a traditional IRA ($7,000 if you're 50 or older). For 2023, those limits increase to $6,500 and $7,500, respectively. While you can contribute to an IRA above these limits, those contributions would not be tax deductible. Depending on your income level, you also may be eligible to contribute to a traditional IRA in addition to your 401(k).¹ Meanwhile, individuals covered under a high-deductible health insurance plan can contribute up to $3,650 ($7,300 for a family) in tax-deductible income to a health savings account (HSA). Check on the rules for your state, as some states do not allow you to deduct HSA contributions. In 2023, HSA contribution limits increase to $3,850 and $7,750, respectively.

Rather than making a lump-sum contribution to your savings at year-end, use this time to plan how to bump up your monthly contributions early in the upcoming year to help spread out the payments, lessening the impact on monthly discretionary income. Investing earlier rather than later may also increase the potential for gains from investment return or compounding.

Keep an eye on tax credit thresholds

Reducing your taxable income through tax-deferred savings can make you eligible for other tax savings, as well. For example, consider a dual-income couple with two children in college and an expected $190,000 in combined taxable income this year. That's too high to qualify for the American Opportunity Tax Credit, which could reduce their income tax by $2,500 for each student. However, if each parent contributed $15,000 to a 401(k) plan, the couple could reduce their modified adjusted gross income by $30,000, qualifying for the tax credit and netting an additional $5,000 in tax savings. Calculating your income with an eye toward tax credit thresholds gives you time to adjust your plan, if necessary, before the end of the year.

Harvest capital losses throughout the year

Capital losses—that is, securities sold for less than you paid for them—can be used on your tax return to offset realized capital gains from other securities sold during the year and up to $3000 of ordinary income to the extent that captured losses exceed capital gains for the year, as long as the loss sale occurs in a taxable account. Harvesting losses regularly can allow you to take advantage of the time value of money by investing current tax savings for potential future growth. If this sounds too complex and time-consuming, consider using the tax-loss harvesting feature on an automated investment advisory service, such as Schwab Intelligent Portfolios^®. You can learn more about tax-loss harvesting and how it works by reading our white paper, "Rebalancing and Tax-loss Harvesting in Schwab Intelligent Portfolios."

Tax planning checklist

Looking for more? Review our year-end checklist and consider which strategies apply to your personal situation. From RMDs and HSA contributions to tax-advantaged retirement accounts and charitable giving tax strategies – we've pulled together key resources to help you get ready to file.

Did you know?

Schwab Intelligent Portfolios monitors accounts of $50,000 or more for tax-loss harvesting opportunities. To enroll in this feature, log in to your account and select the Settings tab.