As 2023 comes to a close, it is essential that you carefully assess your tax liabilities and any opportunities for improvement. From choosing an effective filing status and taking advantage of tax deductions and credits to finding strategies to lower income tax obligations - taking these steps will significantly lower your income tax liability.
If your tax rates will increase next year, delaying an invoice or engaging in tax loss harvesting strategies may make sense to defer income into 2023 and save some tax liability now.
Tax-Advantaged Accounts
Depending on the account type, certain accounts offer either tax-deductible contributions and/or tax-deferred or tax-exempt withdrawals - examples include 401(k), 529 college savings plans and health savings accounts (HSA).
Tax-advantaged investments are an integral component of any sound investing strategy. Municipal bonds offer investors interest exempt from federal taxes, helping reduce their overall tax bill.
Focusing solely on tax efficiency shouldn't be your motivation when investing, but taking steps such as changing asset allocation or adding funds could increase returns and help maximize them.
If balancing your portfolio while taking into account tax implications is leaving you feeling disoriented, consult a financial and/or tax professional. NerdWallet has an excellent list of recommended providers near your location.
Business Entities
Selecting an appropriate business entity is a crucial first step for entrepreneurs, as it affects how you pay taxes, your liability coverage and ease of raising funds from investors. Furthermore, choosing the correct entity determines forms to fill out as well as tax deadlines.
Business tax professionals can help you understand and select the optimal structure for your company - these options typically include sole proprietorship, general partnership, limited partnership, LLC and C corporation.
Leveraging government credits and incentives can significantly decrease your business's overall tax liability, such as by taking advantage of current rates or repatriating profits from overseas subsidiaries to comply with transfer pricing regulations. Utilizing government credits and incentives also provides opportunities to optimize tax savings before taxes increase - such as increasing billing or purchases ahead of an anticipated price increase in input costs to capture savings before it happens.
Tax Deductions
Increased tax deductions are one effective strategy to lower taxable income, such as deducting mortgage interest and property taxes; individuals may also be eligible for dependent child tax credits.
Reducing your taxable income may also be accomplished through bundling charitable donations and making contributions to retirement accounts. More complex strategies, such as partial Roth conversions and minimum distributions from inherited IRAs may require the services of an experienced tax professional.
Another way to reduce taxable income is deferring it into the future. For example, if your tax rates will increase next year and invoice clients for work completed January 2024 in December 2023 instead. This strategy can significantly lower taxable income in the current year and potentially save thousands in penalties; but make sure not to let it dictate your decisions too heavily!
Tax Credits
Tax credits provide individuals with a unique benefit: They directly reduce tax liabilities on an equal basis; "if you have a $1,000 credit, your tax liability will decrease by that amount", says Amy Hamasaki of Mountain Wealth Planning.
Small business owners can take advantage of tax credits by reducing their taxable income. One such deduction is the home office deduction, which entitles them to deduct a portion of their home's square footage used exclusively for business. Other expenses often deducted by businesses include vehicle allowance, health insurance premiums and entertainment expenses.
As 2023 winds down, it is important to assess your income tax situation and consider ways you could either improve or reduce your liability next year. By taking steps now to increase your refund or decrease liability for next year, it can save hundreds of dollars in taxes; using that extra money either to pay off debts or build your savings is an ideal financial move that will pave the way for success.
