Beat the Clock: Last-Minute Tax-Saving Moves for Widows and Widowers Before Year-End
The holiday decorations were up, but Lisa barely noticed them as she pored over her financial documents. As a recent widow, this would be her first time filing taxes without her husband, Tom. The year was quickly coming to a close, and she couldn't shake the feeling that there must be something more she could do to improve her tax situation.
Lisa's story resonates with many who have lost a spouse. As the year draws to a close, widows and widowers often find themselves in a unique financial position, facing new tax considerations and opportunities. At Wings for Widows, we understand that navigating these waters can feel overwhelming, especially when time is of the essence. That's why we've compiled this guide to last-minute tax-saving moves you can make before the clock strikes midnight on December 31st.
The Income Shuffle: Year-End Income Deferral or Acceleration Strategies
One of the most powerful year-end tax-saving tools is the ability to control the timing of your income. Depending on your situation, you may want to defer income to next year or accelerate it into the current year.
Your filing status can significantly impact your tax-saving strategies. For a comprehensive guide on this topic, see our article 'Year-End Filing Status Decisions for New Widows and Widowers'.
1. When to Defer Income
Consider deferring income if:
- You expect to be in a lower tax bracket next year
- Deferring would keep you in a lower tax bracket this year
- You're close to income thresholds for certain deductions or credits
Lisa, for example, realized that her income this year, including Tom's final paycheck and a life insurance payout, put her in a higher tax bracket than she expected to be in next year. She decided to:
- Ask her employer to defer her year-end bonus to January
- Delay selling investments with capital gains until next year
- For her freelance work, wait until January to send invoices for work completed in December
2. When to Accelerate Income
On the flip side, accelerating income might make sense if:
- You expect to be in a higher tax bracket next year
- You're in a lower tax bracket this year due to the loss of your spouse's income
- You're just below the threshold for certain deductions or credits
Consider Mark, another recent widower. His wife Sarah's passing meant a significant drop in household income this year. After consulting with his tax advisor, Mark decided to:
- Convert a portion of his traditional IRA to a Roth IRA, taking advantage of his lower tax bracket
- Sell some appreciated stocks to realize capital gains at a lower rate
- Complete and bill for extra freelance projects before year-end
Remember, the goal isn't just to pay less tax this year, but to pay less tax over time. Sometimes, paying a bit more now can lead to significant savings in the future.
The Deduction Dash: Maximizing Deductions Before the Ball Drops
As the year comes to a close, there's often a mad dash to maximize deductions. For widows and widowers, this can be particularly important as your tax situation may have changed dramatically.
1. Property Tax Payments
If you itemize deductions, paying your property taxes before December 31st could provide a valuable deduction for the current year. However, be aware of the $10,000 cap on state and local tax (SALT) deductions.
Lisa, who had always paid her property taxes in January, decided to pay them in December this year to increase her itemized deductions.
2. Mortgage Interest
Similarly, making your January mortgage payment in December could give you an extra month of mortgage interest to deduct this year. This strategy can be particularly effective if you're on the borderline between taking the standard deduction and itemizing.
3. Medical Expenses
For those who itemize, medical expenses exceeding 7.5% of your adjusted gross income are deductible. If you're close to this threshold, consider scheduling and paying for medical procedures or stocking up on prescription medications before year-end.
Mark, knowing he needed a significant dental procedure, scheduled it for late December rather than waiting until the new year. This pushed him over the medical expense deduction threshold, providing a valuable tax benefit.
4. Charitable Contributions
Charitable giving can be a powerful way to reduce your tax bill while supporting causes you care about. Consider these strategies:
- Bunching Donations: If you're close to the threshold for itemizing deductions, consider "bunching" two years of donations into one year to exceed the standard deduction.
- Qualified Charitable Distributions (QCDs): If you're over 70½, you can make donations directly from your IRA to charity. This counts towards your Required Minimum Distribution but isn't included in your taxable income. The annual limit for QCDs is $100,000 per individual. QCDs can be made from traditional IRAs, inherited IRAs, inactive SEP IRAs, and inactive SIMPLE IRAs. QCDs cannot be made from employer-sponsored retirement plans like 401(k)s or active SEP and SIMPLE IRAs. A QCD can satisfy all or part of the Required Minimum Distribution (RMD) from your IRA, as long as the QCD meets the RMD requirements and is made by the RMD deadline (December 31st). If you delayed your first RMD, a QCD made by April 1st of the following year can still count towards the prior year's RMD. Remember, the charity must be a 501(c)(3) organization eligible to receive tax-deductible contributions. Some restrictions apply, such as distributions to donor-advised funds or private foundations are not eligible for QCDs.
- Donate Appreciated Assets: Donating stocks or other appreciated assets can allow you to avoid capital gains tax while still claiming a deduction for the full market value.
Lisa, inspired by Tom's lifelong commitment to their local food bank, decided to make a significant donation before year-end. Not only did this honor Tom's memory, but it also pushed her over the threshold to itemize deductions, reducing her overall tax bill.
The Retirement Account Roundup: Contributions and Distributions
Retirement accounts offer some of the best last-minute tax-saving opportunities. Here's what to consider:
1. Maximize Contributions
If you're still working, try to max out your contributions to tax-advantaged retirement accounts before year-end:
- 401(k) or 403(b): $22,500 for 2023 ($30,000 if you're 50 or older)
- IRA: $6,500 for 2023 ($7,500 if you're 50 or older)
Remember, while 401(k) contributions generally must be made by December 31st, you have until the tax filing deadline (usually April 15th) to make IRA contributions for the previous year.
Mark, realizing he hadn't maxed out his 401(k) for the year, arranged with his employer to make a large contribution from his final paycheck of the year.
2. Required Minimum Distributions (RMDs)
If you're over 72 or have inherited an IRA, don't forget to take your Required Minimum Distribution (RMD). Failing to do so can result in a hefty 50% penalty on the amount not distributed.
RMDs must generally begin by April 1st of the year following the year you turn 72. If your 72nd birthday is in the latter half of the year, you can indeed delay your first RMD until April 1st of the following year. However, if you choose to delay your first distribution, you will have to take two distributions in that following year: one for the year you turned 72 (by April 1st), and another for the current year (by December 31st).
For those who inherited an IRA from their spouse, special rules apply. You can often treat the IRA as your own, potentially delaying RMDs until you turn 72.
If you qualify for Qualifying Widow(er) status, your tax-saving approach may differ. Our article 'Qualifying Widow(er) Status: Year-End Preparation and Planning' offers detailed guidance on this topic.
Lisa, who had just turned 72 in March, made sure to take her first RMD from her IRA before year-end, avoiding any penalties.
The Investment Improvement: Tax Loss Harvesting
Tax loss harvesting involves selling investments that have declined in value to offset capital gains or up to $3,000 of ordinary income. This strategy can be particularly valuable in years with unusual income patterns, as is often the case after losing a spouse.
For example, Mark realized he had significant capital gains from selling his and Sarah's vacation home earlier in the year. To offset some of these gains, he reviewed his investment portfolio and sold some underperforming stocks, being careful to avoid wash sale rules by not repurchasing substantially identical securities within 30 days.
Remember, while tax considerations are important, they shouldn't be the sole driver of investment decisions. Always consider your overall financial plan and risk tolerance.
The Flexible Spending Account (FSA) Finale
If you have a Flexible Spending Account (FSA) through your employer, remember that these are generally "use it or lose it" accounts. While some plans offer a grace period or limited rollover, it's best to use up your FSA funds before year-end if possible.
Lisa, realizing she had $500 left in her FSA, scheduled a dental cleaning, bought new glasses, and stocked up on eligible over-the-counter medications before December 31st.
The Education Edge: 529 Plan Contributions
If you have children or grandchildren, consider making contributions to their 529 college savings plans before year-end. While contributions aren't deductible on your federal taxes, many states offer tax deductions for 529 plan contributions.
Mark, wanting to honor Sarah's commitment to their grandchildren's education, made substantial contributions to each grandchild's 529 plan before December 31st, maximizing his state tax deduction in the process.
The Business Boost: Strategies for Self-Employed Widows and Widowers
If you're self-employed or have a side business, consider these year-end moves:
- Defer Income: Send invoices late in December so payment is received in January.
- Accelerate Expenses: Purchase necessary equipment or supplies before year-end.
- Set Up a Retirement Plan: Establish a Solo 401(k) or SEP IRA before December 31st to make contributions for the current year.
Lisa, who had started a small consulting business after Tom's passing, decided to invest in a new computer and office furniture before year-end, reducing her business income for the current year.
The Future Focus: Planning for Next Year and Beyond
While these last-minute moves can provide valuable tax savings, it's important to think beyond December 31st. Use this time to start planning for next year:
- Review Your Withholding: If you're still working, use the IRS Withholding Calculator to ensure you're having the right amount withheld from your paychecks.
- Plan Your Charitable Giving: Consider setting up a Donor Advised Fund or creating a giving strategy for the coming year.
- Evaluate Your Investment Strategy: Review your asset allocation and consider whether you need to rebalance your portfolio.
- Update Your Estate Plan: Ensure your will, trusts, and beneficiary designations are up to date.
- Consider Long-Term Care Insurance: As a single individual, long-term care planning becomes even more critical.
For crucial information on estate and inheritance tax planning, which can interact with these last-minute moves, refer to our article 'Year-End Estate and Inheritance Tax Planning After Losing a Spouse'.
Putting It All Together: Your Year-End Tax-Saving Checklist
As the clock ticks down to December 31st, use this checklist to ensure you haven't missed any last-minute tax-saving opportunities:
- Review your income and consider deferral or acceleration strategies
- Maximize deductions (property taxes, mortgage interest, medical expenses, charitable contributions)
- Max out retirement account contributions
- Take Required Minimum Distributions (if applicable)
- Harvest tax losses in your investment portfolio
- Use up Flexible Spending Account funds
- Make 529 plan contributions
- Implement business tax-saving strategies (if self-employed)
- Schedule a meeting with your tax advisor to review your situation
- Start planning for next year's taxes
The Road Ahead: Embracing Your Financial Future
As Lisa checked off the last item on her tax-saving checklist, she felt a mix of emotions. The process had been challenging, bringing up memories of doing taxes with Tom and highlighting the many ways her life had changed. But she also felt a sense of accomplishment and empowerment. She was taking control of her financial future, honoring Tom's memory by ensuring their family's financial security.
Navigating year-end tax planning as a widow or widower is no small feat. It requires attention to detail, understanding of complex rules, and often, difficult decisions. But remember, each step you take is not just about saving on taxes – it's about building a strong financial foundation for your future.
At Wings for Widows, we understand the unique challenges you face. We're here to support you, provide resources, and connect you with professionals who can guide you through this process. As you implement these last-minute tax-saving moves, remember that you're not just managing money – you're creating a pathway to financial security and peace of mind.
The journey ahead may seem daunting, but you don't have to walk it alone. With the right support and resources, you can navigate these complex financial waters, ensuring that you're making the most of every opportunity to secure your financial future.
As you close out this year and look towards the next, know that you have the strength and resilience to face these challenges. Your journey is unique, but you're not alone. Here's to honoring the past, optimizing the present, and building a strong foundation for your future. You've got this, and we're here to help every step of the way.