10 Money Moves to Reduce Your 2023 Taxes
By Mark Yatros
We're closing in on the end of the year and you know what that means? Tax time is right around the corner!
Fortunately, you still have time to take steps to positively impact your 2023 taxes.
We’re going to explore 10 money moves you can make that will help you send fewer dollars to Uncle Sam come April 2024. Please keep in mind that not every tip will work for you. And if you’d like individual guidance, my team and I are happy to help. You can schedule a complimentary appointment by calling 269-218-2100 or by contacting us on our website.
1. Max out your employer's retirement plan
For every dollar you invest in your 401(k), 403(b), or 457(b) plan, you’re lowering your taxable income by that same amount, which means you’ll owe less in income taxes.
For 2023, if you want to max out your employer’s plan, you’ll need to contribute $22,500. If you’re 50 or older, you can make a catch-up contribution of another $7,500 for a total of $30,000.
So, if you have the available cash, consider investing it in your retirement plan. It will pay off in the future with increased savings and now with lower taxes.
2. Contribute to a Health Savings Account
Health Savings Accounts are a bargain if you’re trying to pay less income tax. HSAs help in three ways:
Contributions are tax-deductible, which means you can deduct your contributions from your gross income.
HSA withdrawals are tax-free if they pay for eligible medical expenses such as insurance deductibles, prescriptions, copays, vision, and dental services.
Any interest you earn in your HSA is tax-deferred, which means you only pay taxes on the growth of your money if you use it for non-medical expenses.
There are limits to how much you can contribute to your HSA, so you must be sure to stay within the parameters. For 2023, the maximum contribution is $3,850 for a single person and $7,750 for a family. If you’re age 55 or older, you can contribute an extra $1,000.
3. Don’t Overlook the Home Office Deduction
If you use part of your home for business, you could qualify for a nice deduction. IRS rules state that you must use the space “regularly and exclusively” for business-related activity.
You can qualify for the deduction if you’re a homeowner or renter. The deduction applies even if your home isn’t the only place you do business, but it must be your principal office.
The value of your deduction can be determined in two ways:
Using the simplified method which means you can deduct $5 per square foot for up to 300 square feet of space. So, if your home office is 300 square feet, you can deduct $1,500 from your income.
The more involved option is figuring out your actual expenses against your overall household expenditures. While more complicated, this method could lead to a larger deduction.
It’s a good idea to figure out the amount of your deduction using both options so you’re deducting the most possible. You can use IRS Form 8829 to determine which method is best for you.
4. Consider charitable gifts and QCDs (if you’re old enough)
If you itemize your taxes, you can lower your taxable income by donating to a tax-exempt organization. Depending on the type of donation you make, you could deduct up to 60% of your adjusted gross income. Remember to keep receipts to prove your donations.
If you’ve reached the age where you must take Required Minimum Distributions from your IRA,* consider taking advantage of Qualified Charitable Distributions. QCDs allow you to direct a portion or all your RMD (up to $100,000) to a qualified nonprofit. The amount of the QCD is then counted towards satisfying your RMD for the year. The even better news is that the QCD is excluded from your taxable income.
Please note: The QCD must be a direct transfer from your IRA to the qualified charity. It's crucial that the distribution check is payable to the charity, not to you, the IRA owner, to qualify as a QCD and, therefore, be excluded from your taxable income. Additionally, ensure you obtain a receipt or acknowledgment from the nonprofit demonstrating that you made a QCD to keep as part of your tax records.
*The year you turn 72 or 70½ if you reached that age before January 1, 2020.
5. Review and maximize tax credits
Tax credits are different from tax deductions. While deductions reduce your taxable income, credits directly reduce the amount of tax you owe, dollar-for-dollar. For example, if you owe $3,000 in taxes but qualify for $2,500 in tax credits, you will only owe $500. Some credits can be refundable, meaning if the credit amount is more than the tax you owe, you could receive the excess amount as a refund.
The three most common tax credits to be on the lookout for are the Child Tax Credit, the Earned Income Tax Credit, and the Child and Dependent Care Credit. These tax credits, which are designed to aid families and low-to-moderate-income earners, can significantly reduce tax liabilities.
The Child Tax Credit allows you to claim a credit of up to $2,000 per dependent child under age 17 if your income is under $400,000 if you’re married and filing jointly. The income limit is $200,000 for all other situations.
The Earned Income Tax Credit provides a tax break if your adjusted gross income is below $63,698 for a married couple with three or more kids or below $17,640 for a single person with no children.
The Child and Dependent Care Credit helps you offset some of the cost of paying for daycare for your children and in-home care for older dependents. Depending on your income level, you could claim from 20 to 35% of up to $3,000 for one child or $6,000 for two or more dependents.
There are three more specialized tax credits that could benefit you.
If you purchased a new electric or fuel cell vehicle in 2023, you may qualify for the EV Tax Credit of up to $7,500. The requirements for qualifying for the tax credit are slightly complicated; you can review them on the IRS’s website.
You could qualify for the Energy Efficient Home Improvement Credit or the Residential Energy Clean Property Credit if you’ve made qualifying improvements in your home. For the Energy Efficient credit, you can receive 30% of your qualifying expenses up to $1,200. For the Residential Clean Energy Credit, you can receive credit for 30% of expenditures when you install alternative clean energy solutions such as solar, wind, and geothermal power generators, fuel cells, battery storage, or solar water heaters. For details, please see the IRS’s website.
6. Contribute to a traditional IRA
If you have the available cash, consider investing in a traditional IRA. When you invest deductible contributions, you don’t pay taxes on the investment until you withdraw the money (when you’ll most likely be in a lower tax bracket). This means the money you invest today will be working for you and providing you with extra cash for years to come.
Don't forget you have until April 15, 2024, to make a contribution for the 2023 tax year.
7. Confirm your paycheck withholdings
If you usually receive a large income tax refund, don’t celebrate – adjust how much money is being withheld from your paychecks. When you have too much money withheld from your paycheck, you're essentially giving the government an interest-free loan.
Take a moment to review and potentially adjust your withholdings to ensure that what’s being set aside aligns closely with your actual tax liability. To do this, use the IRS’s Tax Withholding Estimator to check whether you're on the right track or need a tweak.
8. Invest in a 529 plan
When you invest in a 529 plan, you not only help your children or grandchildren pay for higher education, you also improve your current tax situation through state income tax deductions on your contributions. For 2023, Michigan tax filers can deduct up to $5,000 per person or $10,000 for a joint return on their state income taxes. Moreover, your investments in a 529 plan grow tax-free as long as the withdrawn funds are used for qualified education expenses like tuition, room, board, and books.
9. Spend your flexible spending account money
When dealing with a Flexible Spending Account, it’s crucial to remember the mantra: Use it or lose it. The money you contribute to an FSA is pre-tax, thus reducing your taxable income. However, the caveat is that you must use these funds for qualified expenses within the plan year.
Ensure that you leverage any remaining funds for upcoming predictable costs, such as prescription glasses, contact lenses, or other qualifying health-related expenditures. If you anticipate that you'll be needing these items next year, consider making the purchases now to ensure your money is put to good use and not forfeited.
10. Harvest your investment losses
As of this writing, the stock market is up about 14% for the year, but if you’ve had losses, you can use them to offset your 2023 realized capital gains. To do this, total your gains, then subtract your losses. If your capital losses are greater than your capital gains, you can deduct up to $3,000 in net losses from your total annual income. If your losses are greater than $3,000, the excess losses can be deducted in the following years.
It can be challenging to figure out which tax strategies are best for you – especially when employing strategies like harvesting your tax losses. So, please remember that my team and I at Allegiant Wealth Strategies are here to help guide you. Just call 269-218-2100 to schedule an appointment or contact us on our website. [link to landing page]
Want even more year-end tax tips? Check out this blog!
This material has been provided for general informational purposes only and does not constitute either tax or legal advice. Although we go to great lengths to ensure our information is accurate and useful, we recommend that you consult a tax preparer, professional tax advisor, or lawyer.
Allegiant Wealth Strategies offers securities and advisory services through Commonwealth Financial Network®, Member FINRA/SIPC, a Registered Investment Adviser. Allegiant Wealth Strategies has offices in Battle Creek and Portage, Michigan, from which we serve Calhoun County, Kalamazoo County, and Kent County (Grand Rapids). The Allegiant Wealth Strategies team offers no-obligation financial planning consultations; call 269-218-2100 or contact us here.