Reducing your tax bill for 2023
As I write this, the April 17th tax filing deadline is upon us. By now many of you have seen the bad news about your 2022 taxes. Did your tax bill go up? Did you have a surprise? Are you frustrated?
Over the years I’ve asked my CPA the same question that you have probably asked yours: “What can I do to lower my tax bill?” After the close of the tax year the answer is unfortunately uniform: “Not much.”
You may not be able to turn back time on your 2022 tax return but there are some things you can do now to improve next year’s tax bill. As with most financial successes, planning ahead can provide you with the greatest benefit.
Here are some things that you can do to potentially lower your tax bill come next April:
1. Avoiding another tax surprise – If you got hit with a surprise tax bill this year, you have two choices to avoid it next year: 1) file a new W-4 with your employer to withhold more from your paycheck, or 2) make quarterly estimated tax payments to the IRS. I like #1 because it is automatic once you set it up. If you go with estimated quarterly payments, your accountant or tax program provides you with the four vouchers and the dollar amount that you need to send to the IRS. Note: The dates are not exactly every three months. So, you’ll need to put the exact dates from the vouchers on your calendar.
2. Restricted Stock Units (RSUs), Incentive Stock Options (ISOs) and Non-Qualified Stock Options (NQSOs) – Nowadays if you work for a mid-sized to large company in middle management or above, you likely receive some of your compensation in one of these forms. Each one involves different tax impacts at the grant, vesting and liquidation dates making the management of them more complicated than receiving a cash bonus. Unfortunately, many people with this form of compensation often get a surprise tax bill. We recommend working with a tax or financial professional such as a Certified Financial Planner® to carefully plan your transactions and potentially minimize taxes.
3. Consider a side hustle – Do you find yourself helping friends and family figure out PC and wi-fi issues? Are you a writer? Do you like to help friends clean out and organize their homes? Do you make maple syrup every spring? (We have a couple of clients who do.) If you enjoy doing any of these or other jobs, how about charging for it? You can still help your friends and family but at least you’ll get paid something for it. And you don’t have to charge them market rates for your part-time gig. Once you start charging a fee for your services, it can open up a range of possible deductions that you normally are unable to access, including mileage, use of home office, utility bills, etc. Keep in mind that taking business deductions means you’ll need to keep careful track of your expenses and there are special rules around what is deductible for your business.
4. Health Savings Account (HSA) – If you are working, relatively healthy and get your health insurance through your employer, consider a High Deductible Health Plan (HDHP). This plan offers lower premiums in exchange for higher out of pocket deductibles. The real key is that it can be paired with an HSA which can be used to pay those out-of-pocket expenses. What makes HSAs great is that your money is never taxed. It goes in pre-tax, grows tax-deferred and then can be withdrawn tax-free to pay qualified health expenses. There is no other savings or retirement plan that offers all three. While there are limits on how much you can contribute each year, this trio of tax-free benefits can provide an important addition to your savings in retirement when most people are experiencing growing health care expenses. It is worth noting that if you currently are a heavy user of health care services, a HDHP and HSA may not be the best option for you. You can change to a HDHP and HSA during your regular benefits enrollment period in the fall.
5. If you are charitably inclined, make it count – If you make any gifts (cash or in-kind) to qualified charities such as religious organizations, the United Way, the American Red Cross or Goodwill, they may be tax-deductible if you itemize deductions. A qualified charity is one that has been designated a 501(c)(3) organization by the IRS. Political donations are not tax deductible and most GoFundMe’s are not unless the recipient is a 501(c)(3). Taking these deductions requires you to carefully track them and obtain a receipt for any donations greater than $250. Not enough to itemize? Consider “bunching” your tax deductions into alternating years so that you can itemize.
6. Max out your 401(k) or 403(b) – Nearly always a good retirement savings strategy, maximizing pre-tax contributions to your retirement plan at work can help reduce your taxable income. In 2023, the limits went up significantly. The max is now $22,500 for those up to age 49. For those who are age 50 and over, you can defer an additional $7,500 for a total of $30,000. For a married couple, that could be a $60,000 reduction in taxable income.
7. Energy efficiency deductions and credits – If you make qualified energy efficiency improvements to your home this year, you may qualify for a tax credit up to $3,200. The credit can be for qualified energy efficiency improvements, residential energy property expenses and home energy audits made in 2023. The credit allows you to deduct up to 30% of certain types of qualified expenses. It applies to existing homes that are located in the US. There are also incentives for buying and installing energy efficient appliances and heating and cooling systems. Some states, such as Massachusetts, offer additional tax incentives. For more info, go to https://www.mass.gov/guides/massachusetts-energy-rebates-incentives Many other states offer similar energy efficiency incentives, too.
If you have questions about what you can do now to lower your tax bill, give me a call or contact your tax professional (after April 18th). We’re here to help. You can schedule a quick call with me by clicking HERE.
Lyman H. Jackson
Lyman@PlanWithFPS.com
617-653-3303
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