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The end of the year is approaching, and tax season is just a month away! By getting organized now and understanding important tax dates and planning strategies, you can set yourself up for a painless tax season in 2024.
The final day to action any of the tax moves mentioned below for the year 2023.
For those with self-employment income or who pay quarterly estimated taxes, the final estimated tax payment for 2023 is due.
Ensure all your expected income documents, including any W2s, 1099s, Schedule K-1s, or other income-related documents, are in order. Remember that most of these will be sent out at the start of 2024 for the 2023 tax year.
To reduce your tax liability, consider delaying receipt of additional income if you believe you’ll be in the same or a lower tax bracket in the following year.
Maximize your deductions by making additional donations to verified non-profit organizations before year-end. For 2023, you may opt for non-cash donations as well, such as stock or personal items like clothing and home goods, using fair market value. Be sure to keep receipts on file for any charitable donations.
A proven approach to reducing federal income tax liability is to capitalize on available deductions. When employing this tax strategy for 2023, it’s important to determine whether itemizing deductions or taking the standard deduction will have the most significant impact in lowering your federal taxes.
For the 2023 tax year, the standard deduction amounts are as follows:
These deduction amounts reflect changes in the tax law designed to adjust for inflation.
Opting for the standard deduction might be less complicated, but itemizing your deductions can potentially result in greater tax savings. Bear in mind, you’ll need to retain supporting documentation, such as receipts, bank statements, and medical bills, to substantiate your itemized deductions.
Examples of expenses eligible for itemizing deductions include:
To maximize itemized deductions, consider bundling certain expenses. For instance, instead of making an annual donation to a nonprofit organization, you might consolidate the donations into a 2-, 3-, or 5-year bundled payment. This larger, one-time bundled donation, coupled with other itemized deductions, might push you above the threshold for the standard deduction.
If you made energy-efficient additions or renovations to your home after January 1, 2023 may qualify for a tax credit up to $3,200.
The credit equals 30% of certain qualified expenses, including: qualified energy efficiency improvements installed during the year, residential energy property expenses, and home energy audits.
Keep in mind that you must claim the credit for the tax year when the energy-efficient system/s was installed, not just purchased.
In addition to qualified home energy improvements referenced above, there are a number of energy-related credits and deductions for related to the Inflation Reduction Act of 2022. This includes clean vehicle credits for individuals and for businesses — advanced manufacturing investment and production credits, clean electricity investment and production credits, clean hydrogen credit, research and development tax credit, and clean commercial vehicle credits, to name a few.
Contribute the maximum allowed amount to your tax-deferred retirement accounts, such as 401(k) plans, to lower your tax liability. Also, consider maximizing contributions to employer-based Health Savings Account (HSA) or Flexible Spending Account (FSA).
If you’re self-employed or have secondary freelance income, you may want to consider a solo 401(k) plan as a tax strategy. To take advantage of this option for 2023 taxes, the plan must be opened by December 31, 2023. You have until April 15, 2024 (or the extension deadline of your tax return) to contribute up to $22,500 ($27,000 if you’re 50 or older) to the plan and take advantage of the deduction for 2023. You can also make a profit-sharing contribution of up to 25% of your compensation.
Another option is opening a Simplified Employee Pension (SEP) IRA. We advise speaking with a Wendroff & Associates Tax Adviser to review the nuances of your business situation when considering a SEP IRA.
For investments that didn’t improve your financial status, implement a tax loss harvesting strategy by selling losing stocks, bonds, shares, or cryptocurrencies to offset capital gains made elsewhere. The IRS allows you to offset up to $3,000 in losses against your other income in a year when your capital losses outweigh gains.
