Tax Planning Tools and Techniques

With 2022 income tax season well underway and almost three months already passed in 2023, now is an appropriate time to review some evergreen tax planning tools and techniques.

 

I recently attended a NY Public Library webinar about tax planning and below is a summary:

 

Standard Deduction- 2023 saw the largest ever automatic adjustment to standard deductions since indexing was introduced in the 1980s. For example, for married couples, the standard deduction is $27,700 in 2023 vs. $25,900 in 2022 and for individuals $13,850 vs. $12,950. A larger standard deduction means that taxpayers can shelter more income from income taxes.

 

Itemizing Deductions- Only about 10% of taxpayers have sufficient tax-deductible expenses totaling more than the standard deduction. Given the $10,000 cap for state and local taxes, three major areas remain for itemization purposes: mortgage interest, charitable donations, and medical expenses (e.g., an elective surgery) that exceed 7.5% of adjusted gross income.

 

Charitable Gifting- Two methods for consideration to make tax-advantaged charitable gifts are donor advised funds (DAFs), to receive an immediate charitable contribution deduction for the tax year the gift was made, and qualified charitable distributions (QCDs) after age 70½ which counts toward satisfying the current year’s required minimum distribution (RMD).

 

Capital Losses- Due to how capital gains and losses are computed, capital gains (short- or long-term) can be offset by capital losses using an ordering method. It is best to have long-term gains outweigh short-term gains, as the latter are taxed at ordinary tax rates up to 37%. Long-term gains are taxed at rates of 0%, 15%, and 20%, depending upon total taxable income.

 

Income and Expense Shifting- Business owners, including employees with “side hustles,” can shift income to the next tax year by postponing client invoices until after December 31. If they want to increase expenses to lower net income to reduce business-related taxes, they can prepay expenses such as rent, lease payments on business vehicles, and business insurance premiums.

 

Retirement Savings Plans- Maximum contributions for 2022 in traditional IRAs and 401(k)/403(b)/457/TSP retirement savings accounts are $6,000 and $20,500, respectively, for workers under age 50. In 2023, these limits are $6,500 and $22,500, respectively. Workers age 50 + can save up to $7,500 in IRAs and up to $30,000 in employer savings plans in 2023. Taxpayers with earned income can make 2022 IRA contributions until the tax filing date of April 18, 2023. Contributions cannot be larger than their reported taxable income.

 

Roth IRAs- Income limits apply to qualify to make a contribution. In 2022, modified adjusted gross income (MAGI) must be under $144,000 for individuals and $214,000 for married couples filing jointly (mfj). In 2023, those income limits are $153,000 and $228,000 (mjf), respectively. A “back-door IRA” can get around this: people make a non-deductible traditional IRA contribution first and, a short time later, convert their balance to a Roth IRA.

 

A key take-away? Proactive planning can save money. Start planning for 2023 taxes today.

This post provides general personal finance or consumer decision-making information and does not address all the variables that apply to an individual’s unique situation. It does not endorse specific products or services and should not be construed as legal or financial advice. If professional assistance is required, the services of a competent professional should be sought