5 Ways to Gift Yourself Tax Savings This Holiday Season

A qualified charitable distribution (QCD) could also be considered if you need to take required minimum distributions (RMDs) from your retirement accounts. For 2023, you can donate up to $100,000 to a charity directly from your IRA using a QCD. While there’s no tax deduction for the donation, the gifted amount can be used to satisfy all or part of your annual RMD without increasing your taxable income.

2. Revisit Your Retirement Savings: Now is an ideal time to see if you’re on track for maximizing your retirement savings for the year. Contributions to tax-deferred retirement accounts—like your employer’s 401(k) or 403(b)—reduce your taxable income, thus lowering your tax bill. The contribution limit in 2023 is $22,500, or $30,000 if you’re age 50 or older. If you contribute to an IRA outside of an employer-sponsored account, the contribution limit to an individual traditional IRA is $6,500, and an additional $1,000 catch-up contribution is allowed if you’re age 50 or over. However, if you or your spouse are covered by an employer retirement plan, contributions to a traditional IRA may not be fully tax-deductible, as deductions phase out depending on income.

You may also want to consider investing in a future tax break. For the 2023 tax year, individuals with an AGI of $138,000 or less ($218,000 for married couples filing a joint tax return), regardless of whether they participate in an employer retirement plan, can contribute up to $6,500 (or $7,500 if age 50 or older) to a Roth IRA. Since contributions to Roth IRAs are made with after-tax money, your investments grow tax free indefinitely. Non-working spouses can also contribute to a Roth IRA as long as the working spouse has earned enough income during the tax year to cover both contributions.

3. Give Your Health Savings Account (HSA) a Check-Up: If eligible, a tax-smart way of setting aside money for qualified medical expenses and lowering your taxable income is to contribute the maximum amount allowed (or the maximum you can manage) to an HSA. HSAs offer several advantages: You pay no federal taxes on your contributions, no federal taxes on investment earnings, and no taxes on withdrawals if the money is used for qualified medical expenses. For 2023, the contribution limit is $3,850 for individuals or $7,750 for families; an additional $1,000 catch-up contribution is allowed if you’re 55 or older.

4. Rethink Where You Park Your Cash: As interest rates have risen, being mindful of the tax consequences of interest-earning savings accounts is important. For a more tax-efficient savings vehicle, consider buying Series I savings bonds issued by the U.S. Treasury. These bonds earn both a fixed rate of interest and a variable rate that tracks inflation. Individuals can purchase up to $10,000 in I bonds electronically per calendar year, and an additional $5,000 in paper I bonds can be purchased when you file your federal tax return. The tax benefit of saving via I bonds is that the interest earned is exempt from state and local taxes (and may even be exempt from all taxes if used for qualified higher education expenses).

5. Harvest Your Investment Losses: Given the stock market’s volatility this year, perhaps you have some investments (i.e., stocks, bonds, mutual funds, etc.) in a taxable account that have declined in value. Selling these investments will realize the losses, which will offset any realized capital gains and reduce your taxable income. Capital losses offset capital gains without limitation, and an additional $3,000 of realized losses can offset other income (losses in excess of $3,000 will be carried forward to the next tax year). Just be aware of the wash sale rule—buying back the same shares of stock or using the proceeds to buy shares of a substantially identical company within 30 days will defer the realized loss.