Ten Tips to Cut Your 2023 Taxes

As the year winds down, now is the time to take steps to cut your 2023 tax bill while being mindful to not defer so much taxable income that you push yourself into the next tax bracket in 2024. Prior to December 31st:

  1. Increase your 401(k) and 403(b) contributions if you haven’t been contributing at the maximum rate all year. This year you can put up to $22,500 into your 401(k) or 403(b) plan at work. Anyone 50 or older by December 31st can put away an additional $7,500 for a total of $30,000. Contributing to a 401(k) or 403(b) plan at work is one of the best tax shelters available to you during your working years.
  1. If you’re self-employed, consider setting up a Solo 401(k). A Solo 401(k) plan lets a self-employed person hit the $66k retirement plan max with less income than a SEP IRA, and allows a self-employed person aged 50 or older to put away $73.5K for 2023 versus $66k into a SEP IRA. Solo 401k’s are also Roth Conversion friendly by accepting rollovers of tax-deferred income from your current IRAs. 
  1. Take a look at your withholdings and instruct your employer to withhold additional taxes to avoid getting hit with an underpayment penalty if you haven’t had enough taxes withheld during the year. (Take a look at the IRS’ Withholding Calculator to set your withholdings for 2024.) 
  1. Consider selling your investments held in non-retirement accounts that have decreased in value since your capital losses can offset other capital gains realized during the year (including capital gain distributions from your mutual funds). Excess losses can then be used to offset up to $3,000 of wages and other income while any remaining losses get carried over to next year. Make sure to wait at least 31 days before buying back a security sold at a loss, or the IRS will disallow the loss under the “wash sale” rules. Please note that wash sale rules currently don’t apply to crypto losses. 
  1. Consider selling your investments held more than one year that have increased in value if you are in the two lowest tax brackets since the long-term capital gains rate for you will be 0%. You can then buy back those securities, and the “cost-basis” will be the higher amount. Wash sale rules don’t apply to securities sold at a gain. This strategy will save you taxes down the road when you sell these securities. Just make sure that the capital gains realized don’t push you out of the 22% tax bracket since you’ll be taxed on those long-term capital gains that fall outside that bracket at 22%. 
  1. Send in your January 2023 mortgage payment early enough so it will be processed prior to 12/31/23. By sending in your payment a few weeks early, you can deduct the interest portion of that payment a full year earlier if you will be itemizing your deductions. 
  1. Clean out your closets and donate your clothing and household items to a charitable organization, since “non-cash” contributions are deductible if you itemize. Don’t forget to get a receipt. And you should make a list of each item donated, along with its condition, and snap a few photos as well. Remember, only donations of clothing and household items in “good condition or better” qualify for a deduction. 
  1. For gifts of money, making your donation by credit card before December 31st allows you to deduct the donation on this year’s return, even if you don’t pay your credit card bill until 2024. And you always have the option of donating appreciated investments to charities or a Donor Advised Fund. You get to claim your donation based on the value of the assets donated without paying any capital gains taxes on the appreciation. (Use this IRS tool to confirm a charity as legitimate.) Don’t donate investments that have decreased in value. Instead, sell them first, take the loss on your taxes, and donate the money received from the sale. Learn more about Managing Your Charitable Donations. 
  1. Pre-pay your projected state tax shortfall if you’ll be itemizing your deductions and will have less than $10k in state income taxes and real estate taxes combined. Practice owners operating in Massachusetts and many other states as S-Corps and Partnerships can now get around the $10k max and pay their personal Mass taxes on the flow-through profit as a deductible expense to the practice known as the Entity Level Tax. 
  1. Pre-pay and pay off your medical bills if your total allowable medical expenses exceed 7.5% of your income and you itemize.  If you have a qualifying high deductible health insurance plan in place, max out your 2023 Health Saving Account at $3,850 if single or $7,750 for families by 4/15/24. Anyone 55 or older can add $1k to their H.S.A.s.

 Practice owners should begin by finalizing their plans to replenish supplies and pay outstanding bills by 12/31, purchase and install equipment and technology by 12/31, and figure out the maximum retirement plan contribution allowable that makes the most long-term financial sense.

Lastly, as a bonus year-end planning tip, don’t forget that you have 180 days from the date you realize a capital gain to invest up to the full amount of the capital gain into an Opportunity Zone fund and defer paying income taxes on your realized gain until that investment is sold.

And, as always, evaluate whether you’ll save any taxes by postponing 2023 income or deductions into 2024 or by accelerating 2024 income or deductions into 2023. Don’t forget that the Massachusetts millionaire’s tax started 1/1/23, so successful practice owners with income greater than $1M per year should incorporate that new tax in their planning.

IRS Announces Small Increases to Retirement Savings Limits For 2024

Earlier this month, the IRS announced the cost of living adjustments applicable to the various retirement plan limitations for 2024, with most of these tax advantaged savings opportunities increasing slightly from the 2023 limits.

Most working professionals have access to a 401k plan or 403b plan at work. Amounts contributed to these plans generally reduce your taxable earnings and always grow tax deferred. For 2024, you can contribute up to $23k into a 401(k) or 403(b) plan through salary deferrals, up from $22.5k in 2023. With the Roth option, you forgo a current year tax break in exchange for a promise from the government that those contributions will grow tax-free.

Anyone 50 or older by December 31, 2024 can contribute an extra $7,500 into their 401(k) or 403(b) plan through salary deferrals next year, for a total annual contribution of $30.5k, up by just $500 from the 2023 max.  Please note that you don’t need to actually wait until your 50th birthday to be able to start making these catch-up contributions, so adjust your deferrals as of the first paycheck of that monumental year.

Many smaller employers offer their staff access to SIMPLE/IRAs instead. SIMPLE’s work just like 401(k) plans, which means it’s up to each employee to fund the bulk of his or her retirement savings account through salary deferrals. For 2024, the maximum contribution into your SIMPLE as salary deferrals increases to $16k, up just $500 from last year’s limit of $15.5k.  Anyone 50 or older by December 31st can put away an additional $3.5k in 2024, for a total annual salary deferral of $19.5k. Your employer will generally make matching contributions into your account of up to 3% of your salary.

And if you are self-employed, you can contribute up to 20% of your net self-employment income (or 25% of your gross W2 wages paid through your practice) into a SEP IRA. The maximum contribution into your SEP IRA for 2024 increases by $3k to $69k. Solo 401k’s allow self-employed individuals to hit the $69k max on less income and increase the max for people 50 and over to $76.5k as well.

And lastly, the maximum salary for many retirement plan calculations jumps to $345k for 2024, up by $15k from the 2023 max of $330k.

Increase to IRAs

Don’t forget about IRA’s. The amount you can contribute to an IRA increases by $500 to $7,000 per person for 2024. Even if you’re covered under a retirement plan at work, you and your spouse can each contribute up to $7,000 into a traditional IRA or Roth IRA next year, as long as your combined wages and net self-employment income exceeds the total amount you both contribute. Anyone 50 or older can contribute an extra $1,000, increasing the total allowable contribution to $8,000. And don’t forget, you have until April 15, 2024 to contribute to your IRAs for 2023.

There is a bit of good news for people looking to contribute to a Roth IRA in 2024. The amount you can earn and still contribute to a Roth increases by $8k for single individuals and $12k for joint filers as follows:

  • Single Individuals – Phase-out begins $146,000 and ends at $161,000
  • Married Couples – Phase-out begins $230,000 and ends at $240,000

If your income is too high for a Roth, don’t forget that the rules changed more than a decade ago, eliminating the income limitation as of 2010 for people looking to convert their IRAs to a Roth IRA. This tax law change provides high-income taxpayers with a great opportunity to get money into these tax-free investment accounts.  For more information, please check out our article Consider Converting Retirement Accounts to a Roth IRA.

And finally, if you’re married and your spouse isn’t covered under either an employer sponsored or self-employed retirement plan during the year, the phase-out range for your spouse making a deductible IRA contribution has increased to $230k – $240k for 2024, which is identical to the Roth IRA phase-out limits.

Re-Set Your 2024 Retirement Savings Budget

Most people won’t be able to max out these tax-advantaged retirement options unless they get on a budget and put away a set amount of money each month. With 2023 winding down, now’s the time to start thinking about resetting your monthly retirement savings goals for 2024.

I-Bonds Interest Rates Adjusted to 5.27%

We first wrote about I-Bonds in an article included with our November Newsletter available at:

https://schwartzaccountants.com/2021/11/earn-a-guaranteed-and-risk-free-7-12-interest-rate-through-april-while-making-your-portfolio-a-little-more-conservative-by-purchasing-i-bonds/

I-bonds are a great place to park some extra money if you are worried about the short-term prospects for the stock market and are nervous that increasing interest rates will cause bond funds to decline in value too.

According to: https://www.treasurydirect.gov/indiv/research/indepth/ibonds/res_ibonds.htm:

A Series I savings bond is a security that earns interest based on both a fixed rate and a rate that is set twice a year based on inflation. The bond earns interest until it reaches 30 years or you cash it, whichever comes first. NEWS: The initial interest rate on new Series I savings bonds is 5.27% percent through April 30, 2024.

More information on I-Bonds is available at: https://treasurydirect.gov/indiv/products/prod_ibonds_glance.htm

Managing Your Charitable Donations

In addition to the personal tax deductions allowed to be claimed for medical expenses, mortgage interest, and state & local taxes paid in a year, taxpayers are allowed to claim a tax deduction for donations to charitable organizations and qualifying tax-exempt private foundations.

As defined by the IRS, qualifying charitable organizations are: “Organizations organized and operated exclusively for religious, charitable, scientific, testing for public safety, literary, educational, or other specified purposes and that meet certain other requirements are tax exempt under Internal Revenue Code Section 501(c)(3).”

The IRS requires accurate records to be kept as confirmation in order to substantiate any claimed charitable deductions.  Therefore, when making a donation to a qualified charitable organization, taxpayers should maintain proper records in the event of an IRS audit at a later date.  Basic taxpayer record keeping rules for cash (cash, check, credit card, EFT) donations are as follows:

  • Taxpayers must maintain either bank records or a written acknowledgement from the charitable organization noting the amount and date of payment. Bank records include bank statements, canceled checks and credit card statements that show the date of payment, the name of the charitable organization and the dollar amount of the payment.
  • For any single donation of $250 or more in any one day, taxpayers must receive a written acknowledgement from the charitable organization by the earlier of the date the taxpayer files his/her tax return or the due date plus extensions of the tax return.
  • For taxpayers that have set up charitable donations through a company payroll deduction plan, maintaining a copy of the W-2 which shows the amount withheld for charitable contributions over the course of the year will meet the substantiation rules. Additionally, a year-end employer paystub or employer provided document will also satisfy the record keeping rules.

For donations of non-cash items, such as clothing, furniture, housewares, etc., taxpayers will need a receipt from the charitable organization.  Often, the organization will hand taxpayers a blank receipt reporting only the date of the donation.  Taxpayers should complete the form by listing out the items donated, and the fair market value of the items – estimated as best they can as of the date of gift.  There are several on-line sites that provide valuation guides to help donors determine the value of their donated items.  One such resource published annually by The Salvation Army is their “Donation Valuation Guide”:

For taxpayers who donate a vehicle (generally automobiles, boats and airplanes) and claim a charitable tax deduction in the amount of $500 or greater related to the donated vehicle, the taxpayer should receive a Form 1098-C from the charitable organization reporting the proceeds from the sale of the vehicle by the organization within 30 days after the date of sale of the vehicle.  The reported sales amount is the value allowed to be claimed as a tax deduction for the donated vehicle.

Taxpayers are also allowed to claim a tax deduction for donating investments that are held in their brokerage accounts.  Donating long term capital gain property such as stocks, bonds and mutual funds that are held in a taxpayer’s financial portfolio, to a qualified charitable organization allows taxpayers to claim a tax deduction at the investment’s fair market value as of the date of donation.  By donating long term capital gain property, taxpayers can avoid paying the capital gains tax on the appreciated value of the investment while still being allowed to claim the full fair market value of the investment as a tax deduction.  For a donation of a short-term investment, taxpayers are only allowed a charitable deduction equal to the lesser of the cost basis of the security or the fair market value of the security at the date of donation.

When donating time or services to do volunteer work for a charitable organization, taxpayers are allowed to claim a charitable deduction for unreimbursed out-of-pocket expenses incurred while doing the volunteer work.  The qualified expenses must be nonpersonal and directly related to the services being performed for the charitable organization.  For a taxpayer’s record-keeping purpose, the taxpayer will need to obtain a letter of acknowledgement from the organization for the out-of-pocket expenses incurred of $250 or greater.  To substantiate the charitable services performed by the taxpayer, the acknowledgement letter must include a description of the service(s) performed by the taxpayer.  Taxpayers are not allowed to claim a charitable deduction for the “value of their services” provided on behalf of a charitable organization, all that is allowed to be claimed as a charitable deduction for tax purposes is the unreimbursed out-of-pocket expenses incurred specific to providing services that directly benefit the charitable organization while volunteering time to the organization.

For those taxpayers over age 70 ½ and who do not itemize deductions on their tax returns, a qualified charitable distribution (QCD) would be an easy way to make a charitable donation to a qualified charity and still be able to recognize a tax benefit.  Taxpayers age 70 ½ are allowed to take a distribution from their IRA and donate the distributed funds from the IRA directly to a charitable organization.  No tax deduction is allowed for the charitable donation, but the taxpayer does not recognize taxable income on the distributed IRA funds done as a QCD.  For the IRA distribution to be a QCD, this transfer of funds must be done as one transaction, directly from the taxpayer’s IRA to the charitable organization – the taxpayer cannot take a distribution from their IRA and separately write a check to the charitable organization.  For taxpayers age 73 or older, the QCD will also count toward the taxpayer’s annual required minimum distribution.  The maximum QCD allowed per taxpayer per year is $100,000.  A QCD can only be made to 501(c)(3) charitable organizations.   Contributing to private foundations or funding your donor advised fund via a direct IRA distribution would not qualify as a QCD.

Taxpayers are also allowed to make charitable contributions directly from their business.  Although the payment may be made directly from a taxpayer’s company’s operating bank account the payment is not reported as a business expense.  The payment will be allowed and reported as a charitable deduction on Schedule A, personal itemized tax deductions.

And, as we have all seen throughout the internet world, scammers are present everywhere.  Taxpayers need to be aware when solicited by unknown charitable organizations if the solicitation is for a legitimate charitable organization or not.  To help taxpayers verify a charity as being real or fake, the IRS has established a search tool on their website.  The link to the IRS Tax Exempt Organization Search is Tax Exempt Organization Search | Internal Revenue Service (irs.gov).

While gifting to exempt organizations will generally qualify for a tax deduction, there are several common donation scenarios that don’t qualify to be claimed as a tax deduction on your tax return.  The following list of items will not qualify as tax deductible donations:

  1. Donations to political candidates, political parties, and political actions committees (PACs).
  2. Donations to civic leagues and chambers of commerce.
  3. Donations to specific individuals for benevolent purposes to financially assist those individuals such as donating funds to a family to help them recover from a disaster or for an expensive medical procedure that they may not be able to afford.
  4. Guestimates and undocumented donations. Examples include small cash donations without having proper documentation while attending religious services or dropping a bag of clothes and housewares at the local donation drop-off bin without receiving a donation receipt.  Even for such small cash gifts, the IRS requires proof of the donation via a cancelled check, credit card statement or letter of acknowledgement of receipt from the religious organization for gifts less than $250.  Similarly, the IRS requires a receipt from the charitable donation site that is the recipient of property in kind donations listing out the donated items along with the fair market value of each item claimed on the list.
  5. Promises to pay and pledges to a charitable organization. Once the pledge has been paid it then qualifies as a charitable donation for tax purposes.
  6. The purchase of charitable fund-raising tickets. Lottery and raffle-based tickets that taxpayers purchase when sold by charitable organizations as part of their fund-raising do not qualify as a tax deduction.
  7. The cost of tickets to attend a charitable event. However, the amount of the ticket price that exceeds the value of the service or meal that is received by the attendee would qualify as a charitable tax deduction.  The charitable organization should provide the attendees of the event with the amount paid for the ticket that is in excess of value received – that portion of the cost will qualify as a charitable tax deduction.
  8. The value of a week’s stay at your vacation rental home that you donate to a charity auction event. Although you would be able to determine the value of the free week of use of the rental being donated, the IRS does not allow a tax deduction for “less than an entire interest” in a property.  Because you are only donating one week’s use of the property, this donation would be considered a “partial interest” and would not be a qualified charity deduction.  And conversely, the purchaser of the week’s rental use at the charity auction would only be allowed a charitable tax deduction for the excess of the price paid for the auction item above the market value of the week’s rental.
  9. The value of your time or services while volunteering your time to a charitable organization.

 

What to do if you Unexpectedly Receive a Hard Credit Inquiry?

Q:  I just had a hard credit inquiry alert even though I did not apply for a line of credit. Any advice on what to do?

A: That’s unsettling. Are you sure this wasn’t something done by the lender for your practice? Assuming this is in connection with a new line of credit:

1. First contact the lender that pulled your credit to notify them that you did not apply for a Line of Credit with them. There should be a phone number available, or you can look up the lender online. Lenders take concerns about fraudulent activity very seriously.

2. Sign up for credit monitoring through one of the 3 credit reporting agencies – TransUnion, Experian, Equifax. TIP – you might get your credit monitoring at a discounted price through AAA.

3. Lock the credit at the other two credit reporting agencies where you don’t have credit monitoring. NOTE – you’ll need to unlock the credit at all 3 agencies whenever a lender or anyone else needs to look at your credit. It’s a minor hassle, but worthwhile.

4. A good place for information on credit-related topics is www.annualcreditreport.com. This is a website that the 3 credit reporting agencies were required to set up to help out consumers. TIP: you can receive one free credit report from each agency annually.

5. Lastly, visit www.IdentityTheft.gov to report this potential identity theft and get a recovery plan.

Foreign Account Reporting Reminder

Below is a brief summary of reporting foreign accounts, gifts and inheritances. Please note that the penalties for non-compliance can be onerous.

If you inherit or receive a gift from a foreign person of more than $100k:

If you have a foreign account open at any time during the calendar year, no matter how low the balance:

  • Complete the questions at the bottom of the Schedule B attached to your personal return
  • Check the boxes stating that you have a foreign account open, no matter how low the value

If you have foreign accounts open that exceed $10k in any calendar year:

If you are married filing jointly and have foreign accounts with a combined value of more than $150k during the year or more than $100k at 12/31, or any other taxpayer with a combined value of more than $75k during the year or more than $50k at 12/31:

Social Security Max Increases to $168,600 for 2024

Most years, the government bumps up the maximum Social Security taxes that you can pay.  For 2024, the maximum wage base jumps to $168,600, an increase of $8,400, or 5.2%, over the max of $160,200 that was in place for 2023.

At a rate of 6.2%, the maximum Social Security taxes that your employer will withhold from your salary is $10,453. This is $521 higher than the 2023 max of $9,932. Employers then match any Social Security taxes withheld from their staff’s salaries.

Higher Medicare Taxes Due To The Affordable Care Act Passed In 2012:

Enacted more than ten years ago, the employee portion of the Medicare tax jumps from the current rate of 1.45% to 2.35% on earned income in excess of $200k for single individuals and $250k for married couples filing a joint tax return. As of now, the employer will continue to match their employees’ Medicare taxes at a rate of 1.45%, which means the total marginal Medicare tax will be 3.8% for high-income taxpayers. This tax is reported on the Form 8959.

For example, if you’re single, and earn wages of $500k from your job, expect to pay $2,700 in additional Medicare taxes (($500k – $200k) * .9%) for 2013 and beyond.

To increase taxes for high-income individuals even more, the Medicare tax continues to apply to unearned income. Anyone with income over the $200k or $250k threshold should expect to pay Medicare taxes at a rate of 3.8% on interest, dividends, capital gains, and net rental income (except if you rent office space you own to your practice) in addition to any federal and state income taxes due on this income. This tax is reported on the Form 8960.

Calculating the Self-employment Tax:

If you’re self-employed and earn more than $400 in net profit from your business, you’re subject to Social Security and Medicare taxes as well. Known as the “self-employment tax”, you’ll need to complete a Schedule SE to calculate this tax, and then report the amount due on your Form 1040 in addition to your federal income taxes due.

The self-employment tax is based on a Social Security tax rate of 12.4% and a Medicare tax rate of 2.9%. These rates are double those paid by employees, since a self-employed person must pay both the employee’s portion and the employer’s portion of both taxes. Remember, when you work as an employee, your employer matches the Social Security and Medicare taxes withheld from your pay.

Unlike most other taxes, when dealing with self-employment taxes, the more you earn, the less you pay.

Can I Claim as a Medical Deduction the Medical Expenses That I Paid for My Aging Parent?

Even if your parent files their own personal income tax return and doesn’t meet the criteria for you to claim them as a dependent on your own tax return, you might still have the opportunity to deduct their medical expenses when you file your taxes. If you are responsible for providing more than half of your parent’s financial support, you can potentially claim the medical expenses you’ve paid on their behalf throughout the year as a tax deduction. The key to this deduction is the total medical expenses, including those incurred by your parent and your family, that exceed 7.5% of your adjusted gross income (AGI) as stated on your tax return.

In many cases, the medical expenses for your parent are related to care received at a healthcare facility designed to cater to elderly individuals. When your parent is at such a healthcare facility and receives qualifying medical treatment, these expenses can typically be fully deducted on your taxes. This deduction may also extend to lodging and meal expenses. Meal and housing costs for a patient at a medical facility are generally considered fully deductible as medical expenses if the primary purpose of their stay is medical care rather than personal senior housing.

Typically, if your parent is no longer able to care for themselves independently or is suffering from a chronic illness, the costs associated with meals and housing are considered ancillary to their medical expenses and can be claimed as deductions on your taxes, provided you paid for these expenses and meet the support criteria mentioned above. According to the IRS, a chronically ill individual is someone who has been certified (at least annually) by a licensed healthcare practitioner as either unable to perform at least two activities of daily living without substantial assistance for at least 90 days or requiring substantial supervision due to severe cognitive impairment to protect their health and safety.

While healthcare facilities can often offer guidance on what costs qualify for a medical deduction, it’s advisable to have a follow-up discussion with your tax preparer to ensure a clear understanding of which expenses will be eligible for deduction on your tax return.

Did You Overfund Your Retirement for 2023?

For 2023, the allowed max salary deferral for a 403b or 401k plan is $22,500 (or $30,000 if age 50 by the end of the year).  If you have already funded an amount to an employer sponsored retirement plan via salary deferral, then you will be limited in your allowed salary deferral at a second place of employment in a year, whether you work a second job or change jobs throughout the year.

If you do overfund your allowed salary deferral to a 403b and/or 401k plan in a calendar year, then the excess (plus earnings on the amount overfunded through the date of correction) needs to be refunded by April 15th of the following calendar year.  The overfunded amount plus earnings will be taxable in the calendar year overfunded but will not be subject to the 10% penalty when distributed from the plan back to you.  The excess deferral and associated earnings distributed back to you are reported on a Form 1099-R.

Another consideration when you switch employers pertains to the retirement funds at your prior employer.  You generally have the option of keeping those retirement funds invested in your former employer’s retirement plan.

Another option that may help simplify your tracking and management of your retirement funds over time, would be to instruct your prior employer’s retirement plan administrator to distribute the funds from that plan as a direct rollover into either your current employer sponsored retirement plan or into an Individual Retirement Account (IRA).  Consolidating retirement accounts if you periodically switch employers will help you track to better track your retirement assets.

Get a Jump on Year-End Planning

Heading into the last quarter of 2023, October is the perfect time of year to review your year-to-date paystubs in order to maximize pre-tax benefits and other withholding items.  Examining your year-to-date paystub early in the final quarter of the year gives you a chance to make any needed adjustments before the opportunity passes by if you wait until the end of December.

Here are a few good questions to ask to see if you should make changes:

Are you on target to fund the maximum allowed 401k or 403b salary deferral amount?

For 2023 the maximum salary deferral is $22,500.  Plus, if you are age 50 or older you are eligible to fund an additional “catch-up” amount of $7,500 making your total allowed contribution for 2023 $30,000.  Turning age 50 at any time within the year allows you to fund the “catch up” provision as early as January 1 of the current year.  You don’t need to wait until the actual day of turning 50 to begin funding the additional $7,500.

Did you switch jobs or work multiple jobs during the year and fund a 403b or 401k at each place of employment within this calendar year?

The 401k/403b max salary deferral is the total allowed salary deferral for employees from all places of employment during the calendar year.  You are not allowed to fund the $22,500 ($30,000 including catch-up) maximum salary deferral limit at each separate place of employment.

Does your employer offer a pre-tax childcare and/or health Flexible Spending Account (FSA)?

Don’t forget, FSAs offered by your employer are “use it or lose it”.  If you are funding an FSA for childcare or health care expenses, check your remaining balance available to be sure that the funds are fully used by year-end.  Unless your employer has a rollover or a grace period feature, your unused funds at year end are forfeited back to the employer and not eligible to be carried over into the following year.  However, if your employer has implemented the rollover option for your health FSA, then you can carryover up to $610 of unused funds from 2023 to 2024.  Or, if your employer has implemented the grace period option (applicable to both dependent care and health FSAs), then the December 31 cutoff date is allowed to be extended until March 15 of the following year to use up remaining unused funds still available at the end of the year.  For a health FSA, the max contribution limit for 2023 is $3,050 per individual.  For a dependent care FSA, the max contribution limit for 2023 is $5,000 per household ($2,500 if married filing separately).

Are you taking advantage of a Health Savings Account (HSA), if offered by your employer?

If your health insurance plan is a “high deductible health plan” you are allowed to fund an HSA.  Funding is made with pre-tax dollars.  For 2023, the max contribution limits are $3,850 for self-only coverage and $7,750 for family coverage.  If you are age 55 or older at the end of the year, then you can also fund an additional $1,000 into your plan.  Plus, if your spouse is age 55 or older, he/she can establish a separate HSA and fund an additional $1,000 catch-up contribution into that account making your total family HSA contributions for 2023 $9,750.  The major difference between the health FSA and an HSA is that the health FSA is “use it or lose it” at year-end while the HSA works more like an IRA where the unused funds remain in the HSA continuing to grow tax-free and available to be used for qualified medical expenses in future years.

Did you receive a large bonus or have some other significant compensation payout during the year?

The “federal supplemental withholding tax rate” is 22% on special compensation payments to employees.  Typically for bonuses and other special compensation payments paid to you by your employer, federal taxes withheld from the payment are 22% of those taxable wages.  If you are in a higher federal tax bracket than 22% (which is often the case), then federal taxes withheld will be too low and you may find yourself owing taxes next April.  And if you are in a 35% or 37% federal tax bracket and the payout is significant, then your federal tax balance owed the following April tax filing date could be significant as well.  A good idea would be to track down any paystubs reflecting special compensation amounts to see how federal taxes were withheld.