Tax-planning strategies: 6 moves to consider now | Fidelity (2024)

You may still be breathing a sigh of relief about completing your taxes for 2022, and relishing the thought that you don't have to think about filing for many months to come. But with summer fast approaching, it's a great time to start lining up your strategy to help reduce your 2023 tax bill. Starting early can pay off when it's time to file next April.

Here are 6 tax-planning strategies to consider:

1. Examine your W-4 withholdings

Most people fill out their W-4 form and forget about it soon after they've started a new job. But now may actually be a great time to reexamine your withholdings.

Your employer uses your W-4 to calculate how much federal tax should be taken out of your paycheck based on your income (and, potentially, whether you intend to take the standard deduction or itemize). But your income and tax situation may have changed, and you could be withholding either too little, which could increase your tax bill, or too much, which could deprive you of cash throughout the year.

There are a few specific reasons why you might need to update your W-4:

• You've added a dependent since you last updated your W-4. There's a section that allows you to adjust withholdings for dependents, which can help you if you're planning to claim the Child Tax Credit (CTC) for the year. The CTC is a partially refundable tax credit worth $2,000 per qualifying child under the age of 17, and it works as a dollar-for-dollar reduction of your tax bill. Alternatively, dependents who don't qualify for the CTC may qualify for the Credit for Other Dependents. This credit can be up to $500 and is nonrefundable, meaning it may reduce your tax bill to $0, but not beyond.
• You've taken on additional work. If you're working more than one job, or have income from freelance or contract work, you may have more than one W-4 or receive a form 1099-NEC. If the former, you may need to do some strategizing, as filling out a second W-4 the same way you filled out your first could result in the wrong amount of tax being withheld. If the latter, taxes may not be automatically withheld, and you may be responsible for making quarterly estimated tax payments. One solution may be to increase withholding for one W-4 job to cover the tax liability generated from the income earned at the other job.
• You're planning to itemize this year. If you expect to itemize rather than take the standard deduction this year, then you can update your W-4 to reflect the deductions you plan to take. This could also reduce your total tax withholding for the remainder of the year.

Consider also how your taxes went for the 2022 year. Did you owe a large sum or receive a very large refund in the recent tax season? If so, consider checking with your tax professional on whether you ought to make any adjustments to your W-4 for this year.

If you do, your employer's human resources department should generally be able to advise you on how to submit a new form, and when it will take effect.

2. Look for tax losses to harvest

Take a careful look at the winners and losers in your taxable accounts and consider whether it would make sense to sell any of the positions you hold at a loss. This is called tax-loss harvesting, a strategy in which you can use realized losses to offset realized gains (plus up to $3,000 of ordinary income per year, depending on filing status).

A challenge in tax-loss harvesting is to make sure that you maintain your targeted investing mix even as you're selling positions. One way to potentially do so is by selling one investment at a loss and replacing it with a similar, but not substantially identical, security. (When considering tax-loss harvesting, be sure to understand the wash-sale rule. This prevents investors from claiming the tax benefit of selling at a loss and buying the same, or "substantially identical," investment back within a 61-day window.)

3. Reconsider itemizing

Maybe you bought a house or had large out-of-pocket medical expenses this year. If that's the case, you may want to itemize if you think your deductions will add up to more than the standard deduction, which is $13,850 for single filers and $27,700 for married couples for 2023.

There are 5 main categories of itemizable deductions. These include medical expenses, home mortgage interest, state and local taxes, charitable contributions, and theft and casualty losses due to a federally declared disaster. Each of these is subject to various limitations (for example, you can only itemize the amount of medical expenses that is greater than 7.5% of your adjusted gross income).

If you do expect to itemize, it could make sense to start getting organized now, such as by keeping good records of the expenses you plan to itemize.

Planning ahead on itemizing could also help you decide on other financial moves to make over the rest of the year. For example, if you know you're going to itemize this year but you usually take the standard deduction, then it could potentially make sense to "bunch" several years' worth of charitable donations into the current tax year. (Learn more about tax-smart charitable giving strategies.)

4. Boost your pre-tax contributions

Contributions to traditional (but not Roth) employer retirement plans, traditional IRAs, and health savings accounts (HSAs) may all reduce your current federal taxable income dollar for dollar when they are made with pre-tax money. If there's room in your budget to increase your savings and it makes sense within your broader financial picture, consider increasing your contributions to:

• Employer-sponsored plans: 401(k) and 403(b) participants can generally contribute $22,500 for the 2023 tax year (with December 31 as the final date to make contributions). People 50 and older can make catch-up contributions of up to $7,500.¹
• IRAs: You have until the federal tax filing deadline in April 2024 to contribute to a traditional IRA for 2023. The contribution limit is $6,500, and $7,500 if you are 50 or older. While only contributions to a traditional (not Roth) IRA may provide current-year tax benefits, there can also be powerful future tax advantages to making Roth contributions. (Read more about deciding between a traditional or Roth IRA.)
• HSAs: If you have a high-deductible health plan, then you may be eligible to save in a health savings account (HSA), which can let you save now for current and future medical expenses. For 2023, individuals can generally save up to $3,850 per year, while for family coverage the contribution limit is $7,750. Unlike a flexible spending account (FSA), the money in an HSA can stay in your account year after year—potentially growing—if you don't spend it. After age 65, you can even use HSA money for nonmedical expenses. (Read more about healthy habits for your HSA.)

Not only can these contributions potentially result in tax savings this tax year, they're also an investment in your future financial security.

5. Plan for RMDs

The SECURE 2.0 Act increased the age at which owners of certain retirement accounts must start taking required minimum distributions (RMDs) from 72 to 73, starting January 1, 2023. (Starting in 2033, the age at which RMDs must start pushes back even further.)

Note that if you turned 72 in 2022 or earlier, then you will need to continue taking RMDs as scheduled. But if you're turning 72 in 2023 or later, you now have an additional year to delay taking a mandatory withdrawal. (Read more about strategies for those turning 72 soon.)

Withdrawals from traditional 401(k)s and IRAs are taxable, but there are ways to reduce the bite with planning. And it's important to avoid penalties for failing to take RMDs. Starting in 2023, the SECURE 2.0 Act also decreased the penalty for failing to take an RMD to 25% of the RMD amount not taken (from its previous level of 50%). The penalty will be reduced to 10% for IRA owners if the account owner withdraws the RMD amount previously not taken and submits a corrected tax return in a timely manner.

6. Consider a Roth conversion

With market volatility still in the picture and possible tax increases on the horizon, now may be the time to think about a Roth conversion, in which you transfer money from a traditional IRA into a Roth IRA.

A conversion can let you tap into the advantages of a Roth account with that money, including no RMDs and tax-free withdrawals² in retirement. While you'll have to pay taxes on the amount you convert, potentially rising tax rates means there could be an advantage to getting that tax out of the way now. Lower stock prices could also reduce the tax hit on converted money.

If you're a high earner, you might also want to consider a backdoor Roth IRA. It's a way of moving money into a Roth IRA, accomplished by making nondeductible contributions—or contributions on which you do not take a tax deduction—to a traditional IRA and then converting those funds into a Roth IRA. (It's different from a typical Roth conversion, which is the transfer of tax-deductible contributions in a traditional IRA to a Roth IRA.)

Choose the moves that are right for you

Everyone's tax situation is different, and it makes sense to consult with a tax expert or advisor to come up with a financial plan that works for you. With a little planning this summer, you can rest easy knowing that come tax time, you'll be prepared.