Getting organized is half the battle in being ready to have your tax return filed. Having your tax records in order well in advance of the filing deadline can avoid last-minute mistakes that could slow your refund or cause you to overlook deductions or credits.
A number of strategies can be employed to reduce your income or increase your deductions in a particular tax year. Most of these strategies work best if you take some action or consider them before the current tax year begins.
The Paper Chase
Whether you keep your tax records on paper or digitally, the forms you may need to get your tax return filed include:
• W2 from your employer
• 1099-INT for interest received from a bank or other institution
• 1099-MISC or 1099-NEC received for self-employed work
• 1099-R for pension or retirement benefits
• Brokerage statements from your investment advisors
• Form 1095-A, if you are insured through the Health Insurance Marketplace
• Notice from the IRS of an Identity Protection PIN, if you received one
Keep in mind that some institutions can be slow in providing documents or require you to access them online.
This is also the time to let the IRS know if your address has changed.
Pro Forma for Tax Planning
Your tax advisor could perform a “pro forma” tax return projection to determine your possible tax liability by including hypothetical scenarios for various tax strategies. If you anticipate income from investments, your brokerage institution could provide a summary of year-to-date activity to assist your tax advisor with tax planning.
Paycheck Withholdings
The IRS allows employees to provide the specific amount by which they would like to increase or decrease their federal tax withholdings directly. You can use the IRS Tax Withholding Estimator to find out if you have been withholding the right amount. If you need to make adjustments, you would file a new W-4 form at your workplace.
“Bunching” Deductible Expenses
About three quarters of taxpayers benefit from taking the Standard Deduction, $13,850 for 2023 if you are single and $27,700 if you are married filing jointly. If your qualifying deductible expenses are close to the Standard Deduction, you could consider “bunching.” This strategy involves timing the payment of expenses such as property tax bills, medical expenses and charitable contributions so they all occur in the same tax year, allowing you to itemize your deductions. The following year you would then minimize these expenses and take the Standard Deduction.
Deferring Income
If your employer routinely allows employees to defer compensation or bonuses, you could reduce your income and thus your tax liability in a particular year by deferring payment to the subsequent year. If you are self-employed, you could defer some client billing until the next tax year. However, it only makes sense to defer income if you think you will be in the same tax bracket or a lower one the next year.
Donating Appreciated Property
For charitable contributions, you could consider donating appreciated stock or property rather than cash. If you have owned the property more than a year, you could deduct its market value on the date of the gift and avoid paying capital gains tax on the built-up appreciation. Limits on contributions of appreciated stock vary from cash donations, so speaking to a tax advisor prior to donation is a good idea.
Loss Harvesting
Loss harvesting involves selling investments such as stocks and mutual funds that result in a loss, in order to offset taxable gains. If your losses exceed your gains, you can use up to $3,000 of excess losses to offset other income. Losses of more than $3,000 can be carried forward to future years.
Retirement Contributions
Another way to reduce taxable income is to increase your retirement account contributions to the maximum amount allowed. Utilizing a company sponsored 401(k) plan where employers match contributions or contributing the maximum to an IRA are two tools for this. Limits for 2023 are $22,500 for 401k plans and $6,500 for IRA’s. Catch up contributions are available for taxpayers age 50 and older in the amount of $7,500 for 401k plans and $1,000 for IRA’s. Generally, you have until the tax filing deadline of the next year to make IRA contributions.
Additional Considerations
If you have a Flexible Spending Account where your employer sets aside part of your pay for child care or medical bills, you should check to see if you have used it all prior to the end of the year. The excess is forfeited each year, so you may want to schedule any healthcare visits or expenses to utilize these funds.
One thing to keep in mind while considering deferred deduction strategies is that you may be subject to an Alternative Minimum Tax. The IRS calculates this tax separately from your regular tax liability and imposes whichever tax is higher. You should check with your tax preparer to ensure the most beneficial strategy.
If you have questions about this featured topic or other accounting and tax related topics, please do not hesitate to contact us at 727-327-1999 OR [email protected].
ANY TAX ADVICE IN THIS COMMUNICATION IS NOT INTENDED OR WRITTEN TO BE USED, AND CANNOT BE USED, BY A CLIENT OR ANY OTHER PERSON OR ENTITY FOR THE PURPOSE OF (i) AVOIDING PENALTIES THAT MAY BE IMPOSED ON ANY TAXPAYER OR (ii) PROMOTING, MARKETING OR RECOMMENDING TO ANOTHER PARTY ANY MATTERS ADDRESSED HEREIN.
