Revisit your tax plan NOW to minimize your tax burden in the Spring of 2024 and save more of your money. These 6 ideas will help you switch from a reactive to a proactive plan when it comes to minimizing taxes.
- Double-check your withholding amounts. Income tax brackets and marginal tax rates usually change from year to year. We often find people have not updated their withholdings to reflect that, and it is ESPECIALLY important if they have received bonuses or commissions. By adjusting, your withholding accordingly you won’t get a big surprise that you owe, and actually may even still get a tax refund, or benefit from getting more money in each paycheck.
- Deferring income if you can. When you have high-income, high-tax working years, you might want to defer that into your low-tax retirement years, or when you know you will be in a different tax bracket, say getting married, divorced, having a baby etc. Check if your company offers a nonqualified deferred compensation plan where you can defer some of your compensation into the future. You can access those funds after a trigger event, like when you leave the company, retire, become disabled or reach a certain age. This income is only taxable when you receive it.
- Accelerating Income in low-tax years. If you’ve switched jobs, lost your job, or plan to take some time and not work for a few months, this is a great strategy. Accelerating your income is also beneficial if you work on commission and had a slow year. A few simple ways to do that is if you’re employed and paid hourly, work more hours or get a second job. A more complex ways to do this is sell a business, sell real estate or some investments, or do a Roth conversion.
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- When you sell a business, you may defer the proceeds to the future by receiving the sales price over annual installments, which limits the tax impact. However, you may choose a lump-sum payment for your business to recognize the income in a low-tax year.
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- With a Roth conversion, you convert tax-deferred money from your traditional IRA or 401(k) accounts to a Roth IRA, which might allow for tax-free distributions in the future. When you do a Roth conversion, you must pay taxes on any portion of the traditional IRA for which you had taken a deduction. Doing a conversion in a low-tax year — as opposed to pulling money out in a high-tax year — can be a valuable tax planning strategy.
- Tax-Loss Harvesting. Offsetting capital gains by intentionally selling shares of assets that will generate losses is called tax-loss harvesting. Investors commonly do this in December by assessing their portfolio performance to offset the effects of any losses with gains. Investors must be aware of the 30-day wash sale rule, which prohibits you from “locking in” a loss by buying substantially identical securities within 30 days before or after selling an investment at a loss. While common in December, you must understand when and why you should do tax-loss harvesting, which is where your TFG tax and financial professionals can be especially helpful.
- Bunching is a smart tax strategy for people who want to maximize their itemized deductions. By bunching several expenses into one year, you increase the chance of going above the standard deduction amount and being able to itemize your deductions in one single year, resulting in more significant tax savings. For example, if you normally give your favorite nonprofit $1,000 a year, you can give $10,000 in one year instead. Bunching isn’t just for charitable contributions — it can also include business expenses, medical expenses and 529 plan contributions to create a larger income tax deduction in a given year. Keep in mind that certain expenses have a cap, or limitation, on how much can be deducted per year, so make sure you understand those caps and limits so you can take full advantage of the bunching strategy.
- Revisit the types of retirement accounts you are contributing to. Tax-deferred accounts like your 401(k) and traditional IRA offer tax advantages now. You won’t pay taxes on these accounts until you withdraw money in retirement. On the other hand, tax-deferred accounts like Roth IRAs offer tax advantages later in life. Your money is taxed up front, so you withdraw it tax-free in retirement. See below regarding RMDs.
- Taking Required Minimum Distributions. When you turn 73, you must take taxable required minimum distributions (RMDs) from your qualified retirement accounts (Roth IRAs and Designated Roth accounts excluded). To figure out how much you have to withdraw, check the IRS Uniform Lifetime Table.
for the number that corresponds to your age and then divide your account balance as of December 31 of last year by that number. Retirement can be a time when things like taxes on withdrawals from retirement accounts and investment earnings can add up to tens of thousands of dollars in extra taxation over time. You must also consider how higher taxable incomes due to rising RMDs over the years will impact taxes on Social Security payments and create higher costs for Medicare premiums. While each person’s tax-saving strategy will differ, some common tax-saving strategies in this area include taking an RMD as a series of installments during the year or converting your traditional IRA to a Roth IRA.
CONTACT US: If you’re not careful, taxes can sneak up on you, and you don’t want to get caught paying more than you need to. Taxes are something you should be thinking about all year long. Proactively planning your tax strategy can help you maximize your savings and minimize your liability. The more you consider these ideas, the better plan you can put in place before tax deadline arrives.
Many people focus on their financial goals at the beginning of the year but fail to keep them at the forefront of their mind during the latter half of the year. Set aside time this month to review your finances with a TFG Tax and Financial Adviser. There is still plenty of time to make any necessary changes before 2023 comes to an end, email CPA@fuoco.com.
