Sorry to be the bearer of bad holiday news, but end-of-year tax math is not in your favor.
There are lots of lists filled with year-end tax moves, but the fact is that at this point on the calendar, you can’t save yourself much money. Jumping into tax planning at such a late date and flipping a few switches simply won’t achieve that much. Your income is pretty much a known quantity after 50 or so weeks, and there’s no way to go back and erase it so your tax bill is lighter come April.
The immutability of income at the end of the year has always been a truism, but there used to be a lot more wiggle room with deductions, and maximizing them was big business. Then the Tax Cuts & Jobs Act in 2018 nixed a lot of line items, like unreimbursed employee expenses, and increased the standard deduction. Inflation has pushed the standard deduction for 2023 to $13,850 for single filers, $27,700 for joint filers and $20,800 for heads of household. Seniors get even more — an additional $1,950 for single filers and $1,550 for joint filers. So now some 90% of taxpayers take that flat amount off their income and don’t itemize on Schedule A anymore. The standard-deduction figures will be even higher for the 2024 tax year.
For most people, that takes tax-saving moves they might have made in the past, like making donations to charity, off the table. You can still technically do things like maximize pretax 401(k) contributions before Dec. 31, but it may be too late by Thanksgiving to get those processed through your payroll administrator. You can make health-savings account contributions up until the tax deadline if you are eligible, so you still have time for those, but you’ll have to arrange to make them outside of payroll deductions to get them to count for 2023.
A math example
One tip that still makes it onto year-end tax-move lists is to prepay your January mortgage payment in December to maximize the amount of interest you can deduct. This is a good example to illustrate how the numbers usually don’t work out for all the extra effort you have to make.
“The benefit of that mortgage deduction is not as great as it used to be,” says Larry Pon, a CPA based in Redwood City, Calif.
The theory behind this move is that by making an extra mortgage payment in December, you can increase your mortgage-interest deduction for the year, which could reduce your taxable income and thus lower your overall tax bill. If you have a new mortgage, you’re mostly paying interest, because the payment is a ratio of interest to principal that shifts over time. If that is your case, then you’re likely paying a 6% to 7% or more in interest, which will add up.
How much can you actually save by making one payment early and thus having 13 payments for 2023? “It depends on the client’s circumstances, including their marginal tax rate, mortgage-interest rate, and the amount of the extra payment,” says Ekaterina St. Ores, a certified financial planner and enrolled agent tax preparer from McMinnville, Ore.
As St. Ores calculates, if you have a new mortgage with a $500,000 balance and a 7% interest rate, you’d potentially save around $500 if you advance one payment. This is based on a monthly payment of $3,145, of which $2,083 is interest and $1,062 is principal, and a marginal tax rate of 24%.
The numbers will be different based on the age of your mortgage and the rest of your financial situation. If you’re 10 years into a $300,000 mortgage at 3% and you’re in the 12% bracket, you’re not going to save as much. If this is your situation, your monthly payment is $1,264, which is $570 interest and $695 principal. So your savings would be around $70.
One big caveat is that you have to figure out how to get your servicer to credit the payment to your 2023 tax statement. “Sometimes, going to a branch is better than paying online,” says St. Ores. “When you make the payment, you must ensure the bank takes it as a regular payment against the payment due on Jan. 1, not as a one-time extra principal payment. That is important.”
Another caveat: This is mostly a one-time strategy. If you accelerate to 13 payments for 2023, you end up with 11 payments in 2024. To keep it going, you’d need to make two advance payments, then three and so on.
Pon points out that the situation will be different after 2025, when current tax provisions expire. Unless there’s legislative action, taxpayers will go back to the old way of doing things, which means all the deduction strategies of the past will come back into play.
“I’m teaching classes to tax preparers right now, and I’m telling the students, 2026 is coming and you’ll have to learn how to do a Schedule A again,” Pon says. But another important lesson he passes along is that tax advisers have learned in the last few years that taxpayers need to pay more attention to the long game instead of focusing on last-minute moves.
To do that, you can start fresh in January and evaluate your expected income for the year. Then you can maximize the tax-deferral options available to you, like your 401(k), and spread them out across the year. You can also look for opportunities to manage your investing gains and losses as market conditions change without having to rush.
“In terms of tax planning, in the old days, we were focusing on write-offs and deductions,” Pon says. “Now it’s more of a long-term planning strategy.”