Part 2: End of Year Tax Tips

Part 2: End of Year Tax Tips

As we approach the end of the year, it’s essential to turn our attention to strategies that can help reduce your federal tax bill.

Check to see if you qualify for the 0% federal tax rate on long-term capital gains and qualified dividends. If your taxable income, excluding long-term gains and dividends, falls below $44,625 for single filers, $59,750 for head-of-household filers, or $89,250 for joint filers, then you may benefit from this favorable tax rate. It’s a great way to reduce your tax burden.

If you don’t qualify for the 0% rate, don’t worry – there are still opportunities to save. The 20% rate on long-term capital gains and qualified dividends starts at $492,301 for singles, $523,051 for heads of household, and $553,851 for couples filing jointly. The 15% rate applies to filers with incomes between the 0% and 20% breakpoints.

Business owners have a golden opportunity to save on taxes with first-year 80% bonus depreciation. This allows firms to deduct 80% of the cost of new and used qualifying business assets with a useful life of 20 years or less, provided they are purchased and placed in service by December 31, 2023. This deduction is available temporarily and will phase out in subsequent years.

In 2023, businesses can expense up to $1,160,000 of new or used business assets. This limit phases out if more than $2,890,000 of assets are put into service during the year. The beauty of expensing is that it doesn’t have the same taxable income limitation as bonus depreciation.
There are various tax breaks available for buyers of business vehicles. Pay attention to the first-year cap on depreciation, which varies depending on the type and weight of the vehicle.

If you’re a self-employed individual or the owner of a pass-through entity like an LLC or S corporation, you may be eligible for a 20% deduction on your qualified business income. Be mindful of income limits, and consider adjusting your deductions or income to stay within the thresholds.

Make the most of your annual gift tax exclusion by giving up to $17,000 to each person, or $34,000 if you are married. Recipients do not pay tax on these gifts, and they won’t trigger a gift tax return unless your lifetime gifts exceed $12,920,000. While the lifetime gift exclusion won’t affect most people, this number can be adjusted by Congress and has been lower in the past.

If you want to support your children or grandchildren with their college education, consider paying tuition directly to the school. This payment is nontaxable to the student, doesn’t count against the gift tax exclusion, and reduces your estate. Alternatively, contribute to a 529 plan to shelter significant amounts from gift tax.

When you implement one smart financial planning or tax strategy, it can have a compounding benefit for years to come.