Making more money does not always have to mean paying more taxes, but you do need a plan, and more than just a prediction. Whether you are an individual or a business owner, don’t wait till yearend like most folks, when it is generally too late to do much, focus on what you can do NOW, rather than trying desperately to find last-minute tax savings in December.
Now is the best time to put some thought into saving money on taxes. Whether you are an individual or a business, you have created a financial road map in the last 9 months. Use it to stay the course, or change direction by looking at what expenses and cash flow you still have for the rest of the year, and then evaluating what might bring an opportunity for a tax credit and/or a deduction.
Here are 15 top tips:
- If there are charities you want to support, start saving today with the goal of making the contribution around the holidays. If you itemize, you can take a tax deduction for charitable contributions to a nonprofit even if you make your donation on December 31! In fact, why donate cash when you can donate highly appreciated stocks? You get a tax deduction for the full current value of the stock but avoid having to pay capital gains to convert the stock into cash to donate.
- What is the corporate structure of your business? Are you a sole proprietor, S-Corp, LLC, Partnership or C-Corp? As your business and income grows, the best structure for your business may change.
- Are you self-employed and in need of new office equipment? If you can pull the dollars together over the next few months, you can purchase that equipment on December 31st, and still take a business expense deduction on your taxes. If your small business plans to purchase new or used machinery or equipment prior to year-end, you may be able to expense the entire cost in 2023. Under Section 179, taxpayers can elect to expense up to $1,080,000 of the cost of qualified purchases, subject to taxable income limitations.
- Take advantage of 100% first-year bonus depreciation. Unlike the Section 179 deduction, claiming 100% bonus depreciation is not limited to taxable income, although another limitation could apply. Many factors can influence this decision, including current and future tax rates. With the possibility of higher rates in 2024, the best choice may be to wait and see if you are going to be subject to a higher tax rate before you acquire assets, if it is feasible to hold off. Also, under current law, 100% bonus depreciation was reduced to 80% for property placed in service in 2023.
- Have investment gains to offset? Since we are in a “bear” market, you may have some losing investments that you want to get rid of. Consider if you should sell them and deduct the losses. Re-examine the possible tax impact of selling appreciated securities before the end of the year. President Biden has proposed a budget for 2024 that would increase long-term capital gains rates to 39.6% for taxpayers making over $1 million. Combined with the Net Investment Income Tax (NIIT) of 3.8%, affected taxpayers could see a 43.4% marginal long-term capital gains rate, which is quite an increase from the current combined rate of 23.8%. Selling securities that have declined in value may need to wait until 2024 to offset the potential higher tax rate. Losses realized will offset any gains you may have realized. A net capital loss is limited to $3,000 of ordinary income annually, but any excess carries over indefinitely.
- Make sure you are not underpaying or overpaying for 2023, take a second look and maybe adjust withholding or estimated payments.
- How about making an extra mortgage payment to be able to take the interest deduction this year instead of next?
- Discuss with your Fuoco/TFG advisor if it might make sense to itemize this year? If so, you might be eligible for tax deductions including charitable contributions, mortgage interest, property taxes and a portion of medical expenses over a certain amount of your income. For 2023, joint filers can enjoy a standard deduction of $27,700, heads of household $20,800, and single taxpayers (including married filing separately) can claim $13,850. But “bunching” deductions may give you the best of both worlds. Pay two years’ worth of property taxes in a single calendar year, or double up on charitable giving every other year.
- Don’t get burned in bitcoin. Virtual currency is treated as an asset, not currency. Basis in virtual currency is the Fair Market Value (FMV) of the currency on the date it is received. If you receive virtual currency as payment for services, it is considered taxable income and will be subject to both income and Social Security taxes. Also, using virtual currency to obtain cash or purchase goods is a recognizable transaction. If the FMV of property you receive for the virtual currency exceeds the adjusted basis in the currency, you will have a taxable gain. A loss will occur if the FMV is less than your basis. The character of the gain or loss depends on whether the virtual currency is considered a capital asset. Using the Highest-in, First-out (HIFO) accounting method to specifically identify which units you are transferring in any transaction, can reduce your 2023 tax liability and defer the higher gain on lower basis units to a later tax year.
- If you are an individual maximize your retirement plan contributions. If you are a business, consider setting up a qualified retirement plan for a business allows you to make deductible contributions for 2023 while allowing the earnings in the plan to build up without taxation until the funds are withdrawn. Selecting the best qualified retirement plan will depend on the facts and circumstances of your business, including income levels and whether the business has employees. Types of available plans include defined benefit, defined contribution, one-person 401(k), Simplified Employee Pension (SEP), and SIMPLE IRAs. Each type of plan has advantages and disadvantages that should be discussed with your TFG Financial Advisory team. In addition, your business may be eligible for two tax credits related to establishing and operating a small business retirement plan!
- Make business meals great again, by maximizing those expenses. For 2023, food and beverages provided by a restaurant are allowed a 50% deduction. Taxpayers who use the per diem method may treat the entire meal portion of the per diem rate paid or incurred in 2023 as being attributable to food or beverages provided by a restaurant, making the meal per diem 100% deductible.
- If your wedding took place earlier this year, here are some things to remember when you “tie the knot:”
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- Change your tax filing status and check your new withholding
- Make any name and address changes with the IRS
- Marriage often means a new home; the amount of home-sale profit that can be tax-free doubles from $250,000 to $500,000 once you are married. This assumes that you own the house and have lived in it for at least two of the five years prior to the sale. But what if your spouse sold their house BEFORE the wedding? The $250,000 limit still applies just as if they were still single. What if they sold the house AFTER the wedding? Then $250,000 of the profit on the sale of the home can be tax-free.
- If you buy health insurance from the Health Insurance Marketplace and receive advance Premium Tax credit payments, you should report your marriage (and other changes in circumstances such as income, birth of child, new job, home purchase, etc.) to the Health Insurance Marketplace. This will help you avoid owing money or getting a smaller refund that you do not expect when you file your tax return.
- Do you have kids that go to summer day camp? If you have to pay someone to care for your children so you can work or look for work, you can get a tax credit of 35% for the expenses. It doesn’t matter whether you send your kids to day care or to day camp this summer (overnight camps don’t qualify), you can count the costs toward the Dependent and Child Care Credit. By the way, this might also apply to your elderly parent. If you are married, both you and your spouse must be working or looking for work. Both spouses must have earned income in order to claim the credit. Unfortunately, stay-at-home moms or dads do not qualify. For 2023, the total expenses that you may use to calculate the credit may not be more than $3,000 (for one qualifying individual) or $6,000 (for two or more qualifying individuals).
- Do you have a summer home or vacation property, such as a house, condominium, apartment, boat, mobile home, or similar property? Consider renting your property during the summer to someone looking for a summer vacation rental. You can rent it out for up to 15 days a year without paying taxes on the rental income and you can deduct the qualified expenses for the rental home on Schedule A of your tax return. If you paid mortgage interest on your second home, don’t forget to deduct the mortgage interest. Additionally, add up those deductible home improvement expenses.
- Other ideas that might bring tax savings? Remember to tell your TFG/Fuoco Professional if:
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- You employed your child or other family member to work at your business while they were out of school.
- If you visit a casino during your summer vacation, you will need to report any gambling winnings on your tax return. You can deduct your gambling losses if you itemize deductions, but only if you have winnings that are equal to or greater than the amount of your losses.
- If you suffer property damage in summer due to storms, tornadoes, wildfires, and other natural disasters, you can deduct the reduction in value of your damaged property as a casualty loss on your 2023 Tax Return if your home county has been declared a federal disaster area.
Contact Us: Why is tax planning important? With proper tax planning, you may be able to reduce your tax burden or earn a larger refund at the end of the year. It can help you save for your child’s education or a retirement fund, maximize your income and protect you from legal penalties.
A business will be better equipped to make financial projections, strategic business investments and additionally, tax planning will help you understand how changes in your business operations and strategy impact your tax obligations.
Taxes can be a major source of stress, but they don’t have to be. Tax planning will keep more profit in your pocket. Don’t you want to hold on to more of what you make? Contact us at cpa@fuoco.com or toll free at 855-542-7537.
(Article updated November 1, 2023)