We’re now at that time of year where the days are way too short, and we’re counting down the time remaining in 2023. However, now is a great time to talk about taxes — everyone’s favorite subject.

For those looking to minimize their tax liability or enhance a refund, tax loss harvesting is worth considering. The average refund for 2023 stood at $3,054 as of Oct. 27, per the IRS. Beefing that up with some capital losses (offsetting capital gains) can be a great thing for 2023 and years to come — depending on the size of the losses.

Financial planners advise organizing tax-related documents promptly to avoid unnecessary stress in April. Indeed, I’d agree that it’s better to plan throughout the year, as one’s circumstances can change.

Tax planning involves analyzing one’s financial status and devising a strategy to reduce year-end tax payments. It’s advantageous for individuals across all tax brackets. The critical factor is being proactive; waiting until tax filing is too late to modify adjusted gross income. To optimize post-tax income, proactive planning throughout the tax year is essential.

Explore these tax strategies before the year concludes, as recommended by financial experts.

Your Tax Bracket and Tax Loss Harvesting

Creating a successful tax plan begins with understanding your tax bracket. These brackets evolve annually, so it’s crucial to check the latest details on the IRS website or consult a tax planning professional. In 2023, the U.S. features seven federal income tax brackets.

Tax Rate	For Single Filers	For Married Individuals Filing Joint Returns	For Heads of Households
10%	$0 to $11,000	$0 to $22,000	$0 to $15,700
12%	$11,001 to $44,725	$22,001 to $89,450	$15,701 to $59,850
22%	$44,726 to $95,375	$89,451 to $190,750	$59,851 to $95,350
24%	$95,376 to $182,100	$190,751 to $364,200	$95,351 to $182,100
32%	$182,101 to $231,250	$364,201 to $462,500	$182,101 to $231,250
35%	$231,251 to $578,125	$462,501 to $693,750	$231,251 to $578,100
37%	$578,126 or more	$693,751 or more	$578,101 or more

Source: Tax Foundation

Tax brackets operate on a progressive system, where higher incomes incur higher tax rates. It’s crucial to grasp that the tax rate is applied to specific income chunks within each bracket. Seeking guidance from a tax professional can facilitate a better understanding of this fundamental concept for effective tax preparation.

Each year, $3,000 in capital losses can be used to offset one’s income (meaning taxes aren’t paid on the $3,000 at an individual or married couple’s highest tax bracket). For those with more than $3,000 in losses, the remainder is carried forward, with an additional $3,000 per year that can be deducted each year moving forward.

To incur these capital losses, investors must sell a stock that’s declined in value and claim those losses in a taxable account (such as a brokerage account — IRAs or 401(k) accounts won’t work). Those securities can then be repurchased after a certain period (which can vary), so make sure to know how long to wait before re-entering a position. That’s because if investors repurchase a stock too soon, wash sale rules can apply, which aren’t fun for you or your accountants.

Let’s talk about a few other options for investors looking to minimize their tax bill come April.

Boost 401(k) Payments

In addition to tax loss harvesting during this fiscal year, investors can do a few other things to lower their tax bill. One of the best and most obvious options is to max out one’s 401(k) payments for the remainder of the year.

With limited pay days left in 2023, employees can still boost pretax 401(k) contributions, lowering their adjusted gross income. In 2023, the 401(k) limit is $22,500, with an extra $7,500 for those aged 50 and older. 

Growing your nest egg can trim your annual tax bill. Contributing to retirement accounts like 401(k)s and 403(b)s lets you decrease taxable income. In 2023, the limit is $22,500, with an extra $7,500 for those 50 and older. Couples can potentially shield up to $60,000 yearly, providing significant benefits.

Maximizing contributions is crucial, especially for those not fully utilizing employer matching funds or seeking a taxable income reduction. Adjusting 401(k) deferrals before year-end bonuses can swiftly impact earnings and enhance retirement savings.

For those without employer-sponsored retirement accounts, contributing up to $6,500 (or $7,500 if 50 or older) to a traditional IRA is an option. However, income level and spousal retirement plans can impact tax benefits. Individuals earning under $36,000 (or $73,000 for joint filers) may qualify for the Saver’s Credit, worth 50%, 20%, or 10% of contributions up to $2,000 ($4,000 for joint filers), potentially reducing taxes by up to $1,000 for singles or $2,000 for joint filers.

Check for Earned Income Tax Credit Eligibility

It’s advisable to check eligibility for the Earned Income Tax Credit (EITC) during low-income years, offering substantial tax relief. To qualify, investment income should be under $11,000, and total income must be below specified thresholds based on filing status and dependents.

The credit, up to $7,430 for those with three or more dependents, is refundable, providing a refund payment if the person owes no taxes.

Cut Tax Bills

Utilizing various tax planning strategies, such as contributing to 401(k)s and IRAs, can further minimize tax liability. Contributions to tax-deferred 401(k)s reduce taxable income for the contribution year, providing immediate savings. In contrast, Roth 401(k)s don’t lower upfront taxable income but allow tax-free withdrawals during retirement.

Contributions to a traditional IRA may be tax-deductible, contingent on factors like income and spousal retirement plans.

Do Charitable Donations

The 2021 special donation rules have lapsed, requiring individuals to itemize deductions on Schedule A to offset taxable income through charitable contributions. The IRS permits deducting cash donations up to 60% of income. 

Taxpayers choose between the standard deduction or itemized deductions, with the latter encompassing various expenses, including charity, medical and state and local taxes. The Tax Cuts and Jobs Act in 2018 significantly raised the standard deduction, reducing the number of itemizers. For 2023, the standard deduction is $13,850 for singles and $27,700 for joint filers. 

“Bunching donations” accelerate expenses into a single year to surpass standard deduction thresholds. This strategy is particularly popular for donor-advised funds, providing an upfront deduction and acting as a charitable checkbook for future gifts.

Donating appreciated stocks or securities directly to a charity enhances deductions and avoids capital gains tax, especially for inherited stocks misaligned with one’s investment portfolio.

Bottom Line

Effective tax planning strategies can simplify future tax seasons and lead to potential savings. Understanding your tax bracket, distinguishing between tax credits and deductions, deciding between itemized and standard deductions and contributing to a retirement plan are key aspects. 

Being proactive and considering tax-saving methods in advance is crucial. Given the complexity of many investors’ tax returns, consulting a qualified financial and tax professional is essential for comprehensive guidance.

On the date of publication, Chris MacDonald did not hold (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.