2023 is ending, which means tax season is right around the corner, but there is still time to take advantage of tax-saving ideas to lower your 2023 tax bill. Sciarabba Walker wants to help you prepare for tax filing and save you some tax dollars by sharing some updates and strategies.
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We take great pride in the services we provide to our clients. We can offer thoughtful ideas and solutions that can contribute to both your short-term and long-term financial success, and we’re focused on serving the evolving needs of our clients. However, we can only know our client’s needs when they are communicated. The best way you can provide information and prepare for this upcoming tax season is to fill out the client organizer as completely as possible and to provide us with your information as timely as possible. Doing so allows us to provide you with the quality of service that you deserve.
Adjusted Gross Income
Because many tax benefits are tied to or limited by your Adjusted Gross Income (AGI) — IRA deductions and certain tax credits, for example — an essential aspect of tax planning is to estimate both 2023 and 2024 AGI. Your 2022 tax return, 2023 pay data, and other income and deduction-related documents are a good starting point for estimating your AGI. After you’ve estimated AGI, consider whether to accelerate or defer income or deductions. If you expect your AGI to be lower in 2024 than in 2023 or anticipate being in the same or a lower tax bracket in 2024, you may benefit by deferring the receipt of income until 2024. Deferring income, generally available to self-employed taxpayers, is advantageous so long as the deferral does not bump you into a higher tax bracket in the succeeding year(s). Or you may benefit by accelerating income into 2023 if you anticipate being in a higher tax bracket in 2024 than in 2023.
Standard Deduction vs. Itemized Deduction
The standard deduction increases in 2023 to $27,700 for taxpayers who are married and filing jointly, $20,800 for taxpayers who are filing as heads of households, and $13,850 for taxpayers who are single or married and filing separately. If your itemized deductions exceed the standard deduction, it might be more beneficial to itemize your deductions rather than take the standard deduction. Itemized deductions still have a $10,000 limitation on state and local taxes, and medical expenses can be taken when they exceed 7.5% of your AGI. Itemizers can generally deduct 20% to 60% of their adjusted gross income for charitable donations, depending on the type of contribution and type of charitable organization. Suppose you have higher medical expenses, taxes, or contributions for 2023. In that case, you may choose to make a charitable contribution, medical expense, or tax payment in the current year when you would typically do it in the following year to maximize your deduction in the current year.
Tax Rates and Withholding
The seven marginal tax rates will remain the same in 2024 as in 2023, though the income brackets separating each rate have increased with inflation and are still dependent on your filing status. The rates are 10%, 12%, 22%, 24%, 32%, 35%, and 37%. This would be a suitable time to double-check and ensure your tax withholdings or estimated payments look appropriate according to your expected tax. You can still adjust the taxes withheld from your wages before year-end or adjust your final estimated payment before its due date. As a reminder, the final estimated tax payment due date for your 2023 tax return is January 15th, 2024. Ensuring accurate withholding and estimated payments are essential to avoid underpayment penalties. A larger estimated tax payment at the end of the year can still expose you to penalties for underpayments in previous quarters, but withholding is considered to have been paid ratably throughout the year, so increasing it for year-end wages can save you in penalties.
The timing of your investment activities can result in significant tax consequences. A key point to remember is the extent to which you may have capital loss carryovers from your 2022 tax return. The following general rules apply for most capital asset transactions in 2023: Capital gains on property held for one year or less are taxed at an individual’s ordinary income tax rate, and capital gains on property held for more than one year are taxed at more favorable capital gains tax rates, depending on your regular income tax bracket. For 2023, the maximum capital gains rate is 20% for a taxpayer with taxable income above $553,849 in the case of married filing jointly or as a surviving spouse, $276,899 for a married individual filing a separate return, $523,049 for an individual who files as head of household, or $492,299 for any other individual. For taxpayers in the lower tax brackets, the capital gains rate is 0% or 15%, depending on your income and filing status. Some mutual funds can generate a significant amount of short-term capital gains, which are taxed at your ordinary income tax rate, so you want to avoid purchasing such mutual fund shares later in 2023, as such funds often declare capital gains distributions at year-end. You will be taxed on the full distribution even though you may have only held the shares for a short period.
Maximizing Retirement Savings
If you are not contributing the maximum amount permitted to your §401(k) account for 2023, you still have time to increase contributions for the remainder of 2023 to lower your AGI. Maximizing pre-tax retirement contributions is a good tax-saving move. Self-employed individuals generally can make contributions to a SEP IRA that cannot exceed the lesser of 25% of compensation or $ 66,000. The SEP contribution is an above-the-line deduction that reduces the AGI subject to tax.
Residential Clean Energy Credit
For 2023, a tax credit is available to homeowners and tenants who install certain energy-efficient property on their residence, such as solar panels, solar water heaters, geothermal heat pumps, wind turbines, fuel cells, and battery storage technology. The credit is nonrefundable, so it is limited to the amount you owe in taxes. However, you can apply any unused credit amount to reduce the tax you owe in future years. The residential clean energy credit is available for property installed on or in newly constructed homes and existing homes in the United States that you use as your residence.
Energy-Efficient Home Improvement Credit
If you make qualified energy-efficient home improvements, you may qualify for a tax credit of up to $3,200 for the year the improvements are installed. The home must be in the United States, and it must be an existing home that you improve or add onto, not a new home. You cannot claim the credit if you are a landlord (or other property owner who doesn’t live in the house). The credit amount is 30% of certain qualified expenses, including windows, skylights, exterior doors, and insulation installed in or on your primary residence, energy-efficient heat pumps, central air conditioners, furnaces, and water heaters installed on your primary residence or second home, and home energy audits. The maximum credit you can claim in 2023 is $1,200 for energy property costs and certain energy-efficient home improvements, plus $2,000 per year for qualified heat pumps, biomass stoves, or biomass boilers. Many property-specific limits apply, and you can access limits and qualifications here. The energy-efficient home improvement credit is nonrefundable, so it is limited to the amount you owe in taxes, and you cannot apply any excess credit to future tax years.
Clean Vehicle Tax Credits
A clean vehicle tax credit is available to certain taxpayers, subject to AGI limits if you purchase a plug-in electric motor vehicle or a fuel cell motor vehicle that is delivered to you in 2023. The maximum credit allowed per vehicle is $7,500. The credit is available to individuals and their businesses. Vehicles are not limited to passenger automobiles or new vehicles. They also include, for example, vans, sport utility vehicles, and pickup trucks. To qualify, a vehicle must meet all requirements, and there are many, so we suggest you go to www.fueleconomy.gov to determine if your anticipated purchase qualifies. The credit is nonrefundable, and you cannot apply any excess credit to future tax years.
Gifting and Charitable Giving
For 2023, the annual gift exclusion limit is $17,000 per person you make a gift to. For married filing joint returns, the two can combine their exclusion amount in a single gift and give up to $34,000 in one gift per person. These gift exclusions allow you to give gifts, whether in aggregate or at once, to an individual during 2023 up to these amounts without impacting your estate or lifetime gift tax exclusion. While there is an exclusion limit on the amount of a gift you can give to one person, there is no limit to how many individuals you can give gifts to. Gifts may also be given to 529 Qualified Tuition Plans, allowing you to save for future education expenses in a tax-advantaged savings plan. Many states allow a deduction or tax credit per beneficiary for contributions to that state’s 529 plan (New York State is $10,000 total). Under a special rule for 529 plans, you can “front-load” five years’ worth of annual gift tax exclusions and make up to an $85,000 contribution per beneficiary in 2023 ($170,000 if gift-splitting with a spouse).
If you are 70 ½ or older, you can make direct contributions from your IRA to charity of up to $100,000 during 2023, and those distributions can be used to satisfy your required minimum distribution. You can’t claim a charitable contribution deduction for the direct contribution, but the amounts are not included in your taxable income. You also may elect a one-time contribution from your IRA of up to $50,000 to charity through a charitable gift annuity, charitable remainder unitrust, or charitable remainder annuity trust funded only by qualified charitable distributions.
We are Ready to Assist
In 2023, we witnessed a relatively quiet year regarding legislation, and as of this writing, there is no active pending tax legislation in Congress. Congress is expected to pass an omnibus spending bill later this year, which could address various temporary tax provisions. Your team at Sciarabba Walker is continuously evaluating changes to tax policy and will inform our clients if changes occur. Please stay tuned to our website and follow us on social media for the most up-to-date tips and guidance as it becomes available.
We would be happy to assist you with your year-end tax planning or answer any questions. Please reach out to your personal Sciarabba Walker contact or email us at firstname.lastname@example.org at your earliest convenience.
By Cliff Acheson, CPA