It is no secret that nobody wants to end up with an unpredicted tax bill. To help make sure that doesn’t happen, here are 11 tactics you can use to reduce your overall tax burden throughout 2023. While utilizing some of these 11 strategies may necessitate itemizing tax deductions instead of taking the standard tax deduction, it could be well worth it to lower your tax.
In addition to tax deductions and tax credits, other means of tax optimization can be particularly advantageous to lower your tax. These approaches have become increasingly popular in recent times, so let’s look at some of them.
Also a Dedicated Tax Professional can walk you through your tax filing from start to finish for free.
1. Re-evaluate and Slight Adjustments to Your W-4
Adjust your W-4 before it’s too late. This form is critical, as it tells your employer how much tax to deduct from every paycheck. This year, you may have been surprised by a large tax bill. However, you can take steps to ensure that doesn’t happen again. Increase your tax withholding amount so when it comes time to file taxes, the refund or payment due is lower than it would have been. In comparison, those who got a sizable refund should reduce their withholding as they could be living on less of their paycheck throughout the year otherwise. You can adjust your W-4 at any given moment.
2. Maximize Your 401(k)
You can use 401(k)s to lower your tax bills. Contributions to a 401(k) made directly from your paycheck are not taxable by the IRS. By 2023, you can contribute up to $22,500 annually to one of these accounts. This provides a significant tax savings opportunity for individuals.
Regardless of your age, the idea of contributing to a retirement fund is something worth considering. For those 50 or older in 2023, you can contribute an additional $7,500. 401(k)s are the most common type of retirement accounts sponsored by employers, and even self-employed people can open their own.
3. Options from the IRA
When planning for retirement, two primary options are Roth IRAs and traditional IRAs. Depending upon one’s income level and whether they or their spouse have a retirement plan at work, contributions to a traditional IRA may be eligible for a tax deduction.
In the 2023 tax year, those who are married and filing jointly may be unable to deduct their contributions to a retirement plan at work should their modified adjusted gross income exceed $136,000. It should be noted that this is only applicable in cases where a retirement plan covers the taxpayer through employment.
Contribution limits for an IRA in 2023 are set at either $6,500 annually or $7,500 for individuals 50 or older. Although the calendar year has already begun, you still have until the tax filing deadline to make contributions from the prior year’s income.
4. Save Up for College Ahead
Parents eager to save for their child’s tuition may be able to receive a tax break. A popular choice is the 529 plan, an educational savings account operated by a state or educational institution. While contributions are not deductible on federal taxes, some states may allow for deductions when contributing to their 529 plans. It’s important to be mindful of the gift tax limit, which currently stands at $17,000 per beneficiary in 2023 and beyond.
5. For the Employers, Use the FSA
Taking advantage of a flexible spending account can be a great way to save on taxes. Your employer may offer an FSA, and every year, you can deposit up to $3,050 in pre-tax dollars from your paycheck into this account. This can be a smart move when it comes to lowering your tax bill.
The money allocated each year for medical and dental expenses can be used to purchase items such as first aid, bandages, breast pumps, pregnancy test kits, and acupuncture related to healthcare. These goods apply not only to yourself but also to your designated dependents. Employers may enable the funds to roll over into the following year.
6. Use your Dependent Care FSA Account
A great way to pay less taxes in 2023 is by using a Dependent Care FSA Account. Employers often offer these unique FSAs, and the IRS will not include up to $5,000 of your salary when it is diverted into one of these accounts. You can then exclude this from paying taxes on that total amount.
For parents of young children, there may be significant advantages to their employers’ benefit plans. Usually, allowable uses are daycare, before- and after-school care, preschool and day camps. It is possible elder care could be included as well. However, it is important to review the documents pertaining to your plan for complete information about what is covered.
7. Maximize Your HSA
For those with high-deductible health care plans, one way to reduce taxes is to open a health savings account. Money put into an HSA is exempt from taxes when deposited and tax-free when used for qualified medical expenses.
In 2023, individuals who have self-only high-deductible health coverage can contribute to tax deduction up to $3,850 to their Health Savings Account (HSA). Families with the same type of cover can invest up to $7,750. Folks aged 55 and higher are entitled to an additional contribution allowance of $1,000. Establishing an HSA is possible through your workplace or other banking institutions.
8. Explore if you Qualitfy for the EITC
Do you believe your earnings in 2023 will amount to less than $63,398? In this case, it could be a great idea to investigate whether you’re eligible for an Earned Income Tax Credit(EITC). This valuable tax break could potentially offer credits of up to almost $7,500 depending on your financial status (marital and children)
Rather than simply reducing how much of your income is subject to taxation, as with tax deductions, getting tax credits can be even more beneficial by providing real savings. In fact, should the credit result in your total tax bill coming to less than zero, it’s possible for the IRS to refund some or all of the money back to you.
9. Charity and Donations
People can get a tax deduction for contributions to charity, and these don’t even have to be in the form of money. Items such as clothes, food, sports equipment, or other household goods that have been given away are all valid items to deduct from taxes – as long as you get a receipt from a legitimate organization.
As you prepare to do your taxes in 2023, consider itemizing your deductions. Doing so can allow you to receive a charitable contribution tax deduction of up to 60% of your adjusted gross income. To make sure that all donations are accounted for correctly, create an itemized list of any items donated prior to dropping them off at places like Goodwill. With the help of tax software programs, these donations could potentially add up to substantial deductions.
10. Collect and File Your Qalitifed Medical Expenses
It’s important to keep documents related to hospital stays or costly medical or dental care for the 2023 tax year. But to lower your tax bills, know that your medical expenses that are qualified which exceed 7.5% of your adjusted gross income can be tax deducted from that year’s taxes.
Thus, your adjusted gross income is $40,000. In that case, above $3,000 of your medical costs – representing 7.5% of your AGI – may be deductible. Suppose you had $10,000 in medical bills; then you could claim deductions on the sum of $7,000.
11. Prepare and File in a Timely Manner
By the end of the year, there can be a dramatic difference in tax implications depending on when you make certain purchases. Therefore, it is wise to analyze whether an expense can be paid before December 31st instead of waiting until January for increased tax benefits. To illustrate this concept, consider how making your mortgage payment at the end of the year could provide additional interest deductions compared to when it would have been processed in January.
Regarding tax season, one should be conscious of being close to the medical-expense deduction threshold.