It is early March, and you are likely dealing with your 2022 taxes — either you’re knee-deep in it, you’re done (overachiever), or you’re procrastinating.
Looking ahead, here are some basic planning techniques you might be able to implement for the 2023 tax year.
Your retirement plan contributions: If you’re still working, your employer retirement plan (401k, 403b, deferred compensation, federal TSP, simple IRA), offer you significant tax benefits. The IRS allows you to contribute $22,500 per year if you’re under 50, or $30,000 per year if you’re 50 and up. If you choose, these contributions can reduce your taxable income. (For simple IRAs, the numbers are $15,500 under 50 and $19,000 50 and up). Furthermore, you can take these deductions no matter how much you make. Many tax deductions “phase out” at higher incomes, but not retirement plans.
IRA contributions: IRAs are like a 401k, but they’re not connected to an employer. Unless your income is above a certain point, you can contribute $6,500 (if you’re under 50) or $7,500 (50 and up), and deduct it from your income. Note: Roth IRA contributions are not tax deductible. Another note: you can still make IRA contributions for 2022 until April 15 (or your filing deadline).
Health savings accounts: this is another great tax savings option for people who are still working, regardless of income. HSAs have five tax advantages: 1. your contributions are tax deductible 2. The money can grow tax deferred and 3. You can withdraw the funds tax-free if used for medical expenses. 4. You can use the funds for any purpose after age 65 with no penalties, essentially becoming IRA dollars. 5. Unlike an IRA, there is no required minimum distributions from an HSA. In individual can put $3,850 into an HSA, and a family can do $7,750. Only certain types of health insurance plans allow HSA contributions, and you can no longer make them once you’re on Medicare.
Business losses: if you have a business, no matter how small, you likely have business expenses. Many of you are very generous and don’t charge enough for your services. You may very well have expenses that exceed your income. This can most likely be claimed as a deduction. A client of mine is starting a security business. He had no income in 2022, but he bought equipment like guns, holsters, a vest and he had business mileage. Talk to your tax accountant about this.
Withholdings: Adjust the amount of tax withheld from your paycheck to avoid unpleasant surprises. I suggest talking to your tax accountant, as the worksheets and tips provided by the employer are of little help. These worksheets don’t know your whole financial situation, so there’s only so much help they can provide.
Capital losses: If you have non-retirement accounts (mutual funds, stocks, etc), you may have a chance to sell some investments that are down. This can create a taxable loss. Talk to your financial planner or investment adviser about this.
Qualified charitable distributions: This is a very cool technique used by very few people in my experience. If you are at least 70.5, you can send money directly from your retirement account (IRA, 401k, etc) to a church or charity. Unlike most retirement distributions, this does not count toward your taxable income. This is better than taking a withdrawal from your retirement account, then donating the money. Without getting into the weeds, this latter technique is more difficult to deduct from your taxes. Many of you are giving money to charities and churches anyway – why not do it in the most tax-efficient way?
Once again, I want to emphasize that you need to talk to your tax accountant about these ideas, since we don’t provide tax advice.
P.S.: Speaking of looking ahead, this is off the subject, but I gotta say it. Congratulations to Missouri state employees, who have earned an 8.7 percent pay raise for the upcoming fiscal year!
Travis Ford is a certified financial planner with Wallstreet Group Advisors in Jefferson City. Securities and advisory services offered through CreativeOne Securities LLC member FINRA / SIPC and an investment advisor. Wallstreet Group Advisors and CreativeOne Securities are not affiliated.