With the end of the year in sight and the harsh reality of increasing inflation, the thought of 2023 taxes might not be at the forefront of your mind, but right now is the perfect time to get a head start on your tax planning strategy for next spring.
Taxes aren’t due until April 18, 2023, but there are plenty of things you can do right now to help get organized and maximize your savings when filing your 2023 taxes.
I’ve compiled up-to-date tax planning strategies to help you feel more prepared for the coming tax season. Some of these changes take time to implement, so grab a cup of coffee and get started today!
1. Internal Revenue Service (IRS) Checklist for 2023 Taxes
Right now is the perfect time to make sure all your tax information is up to date so that when it comes time to file, you don’t have to scramble for the necessary information. Check out the following list to help organize your tax planning strategy.
Gather and organize tax records
Check your Individual Tax Number
Make sure you’ve withheld enough tax (see #3)
Set up direct deposit for tax refund
Preparing these documents and accounts now will save you time next spring.
2. Be Aware of Updated Tax Brackets
New tax brackets released by the IRS mean potential tax cuts for millions of Americans. Being aware of the new brackets can help you strategically plan your taxes.
The new 7.1% adjustment is the largest in decades and has the potential to protect your income for taxes next year.
Current tax brackets are:
35% for incomes over $231,250 ($462,500 for married couples filing jointly).
32% for incomes over $182,100 ($364,200 for married couples filing jointly).
24% for incomes over $95,375 ($190,750 for married couples filing jointly).
22% for incomes over $44,725 ($89,450 for married couples filing jointly).
12% for incomes over $11,000 ($22,000 for married couples filing jointly).
Knowing your tax bracket allows you to accurately calculate your taxes so you don’t under or overpay.
3. Check Your Paycheck for 2023 Tax Withholdings
When you work for an employer one of the most important documents you can fill out is your W4 form. It can be easy to forget what you signed months or even years ago. You can plug in information from your latest paycheck (and your spouse’s, if applicable) to the IRS’s tax withholding calculator and see your projected refund or tax bill for next year.
This tool will give you adjustment tips depending on your goals and current withholding. Any changes now won’t make a significant difference on this year’s tax return - but you can still make changes to your W4 so you’re on track for the following tax year.
If you are a freelancer, make sure you’ve accurately contributed to your quarterly tax bill and make any catch-up payments, if necessary. Remember, there’s still one more quarterly payment due in January.
Tax withholding paperwork is not just a “one-and-done” task. As your income changes, you’ll want to update your W4 so you don’t get any surprises in April.
4. Increase Retirement Contributions
Another area you may forget about once it's established is your retirement accounts. This year, the IRS increased the amount an individual can contribute to their retirement accounts - now up to $22,500 for IRAs and 401(k)s.
If you haven’t hit the max contribution limit yet - and you have the extra money in your budget - consider increasing your retirement contributions. Some tax brackets could knock almost $5,000 off their tax bill by saving for the future!
5. Consider Deferring End-Of-Year Bonuses and Payments
End-of-the-year bonuses are exciting. Especially in a year where we all wish we had an extra $50 in a hidden pocket. But, it may be to your advantage to put off the bonus so your taxable income isn’t increased for this tax year.
As an employee, you can ask your boss you hold off on your bonus until 2023. You’ll still get the money, but if you’re approaching a new tax bracket and your bonus could push you into higher taxable income, you may want to wait until next year – which is only a few weeks away.
If you’re a freelancer, you may consider not collecting payments on a contract until the new year. But, use this route with caution, you don’t want your contractees to get the wrong idea and start delaying all payments.
6. Consider Business Expenses
If you own your own business or do freelance work, you can save a lot of money on taxes by deducting business expenses.
The amount you’ve spent on business expenses decreases your taxable income. For example, if you earned $80,000 and spent $10,000 on business expenses, the IRS will only tax you on $70,000 of your income.
Depending on how much you’ve already spent on this year's expenses, you may want to consider buying more to add to the deductions available this year - only if they are necessary purchases, of course!
As a small business owner, you can choose either to do an itemized or standard deduction. The itemized deduction is a lengthier process but it potentially increases your chances for a larger deduction. The standard deduction - which is quicker and simpler - might cause you to lose out on savings opportunities.
Comb through your receipts and make sure all expenses are well-documented and organized into categories. There are fantastic apps available to help you keep track of your business expenses and stay organized.
7. Make Charitable Contributions
If you itemize charitable contributions, consider increasing your donations by the end of the year. Most people who itemize their charitable contributions can deduct up to 50% of their taxable income for cash assets. For non-cash asset contributions, you can see up 30% deduction from AGI.
If your contributions surpass the deduction limit, they can be carried over for up to 5 consecutive tax years. This is an exciting prospect! Your charitable contributions can make an impact on the business of your choice and your own financial well-being for years to come.
8. Combine Medical Expenses For Maximum Deductions
You may also consider bundling medical expenses into the same calendar year. Medical expenses can create a significant tax break but only if your expenses exceed 7.5% of your Adjusted Gross Income (AGI). For example, if your income is $100,000 and you spend $10,000 on medical expenses, you can deduct $7,500 ($10,000 - $100,000 x 7.5%) from your taxable income.
If possible, group all major medical expenses for one year: eye exams, dental visits, new glasses, elective surgeries, or any medical visit that can get you up to the 7.5% threshold.
On the flip side, if you're not close to the 7.5% threshold this year, put off anything elective until next year and reap the benefits the following tax season.
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Content in this material is for general information only and is not intended to provide specific advice or recommendations for any individual.