As we start the New Year and prep for 2022 taxes, financial professions will often tell you it’s not too early to start thinking about 2023. You certainly don’t want to wait until the end of the year to start tax planning – it’s generally too late to make some critical tax decisions and minimize your taxes.
To help you get there, here are five tips to help you reduce your taxes in 2023.
- Take advantage of the increase in the standard deduction in 2023.
“The standard deduction is increasing because of the inflation adjustments in the high inflationary environment that we saw in 2022,” says Dave Alison, founding partner at Prosperity Capital Advisors in Westlake, Ohio.
The standard deduction for married couples filing jointly for tax year 2023 rises to $27,700 up $1,800 from the prior year, according to the IRS. For single taxpayers and married individuals filing separately, the standard deduction rises to $13,850 for 2023, up $900; for heads of households, the standard deduction will be $20,800 for tax year 2023, up $1,400 from the amount for tax year 2022.
“And then if they are over the age of 65, there’s an additional $1,500 per taxpayer; for a married couple $3,000,” says Alison. “Essentially, what that means is for a married couple over the age of 65, there’s $30,700 of income that they can take out without having to pay income tax.”
- Know which tax bracket you are in
“When you’re thinking about your roadmap of retirement income for the upcoming year, measure your tax brackets,” Alison advises. “The other big tax planning opportunity is to then look at how much income could you have before you get out of the 10% tax bracket into the 12% tax bracket. And then along that same line of thinking, how much income could you potentially have before they get out of the 12% bracket and into the 22% bracket.”
The reason, according to Alison: A married couple over 65 could have $89,450 in taxable income before they move into that 22% bracket. “If they have a $30,700 standard deduction, plus almost $90,000 of income, they could have about $120,000 of total income and still be in that 12% bracket.” Even if they only had $80,000 in income, he says, they still have the potential for $40,000 in additional income before they moved to the next tax bracket. That could help in deciding how much to withdraw from retirement accounts.
- Consider a Roth IRA conversion
Brian McGraw, senior wealth advisor at Hightower Wealth Advisors in St. Louis, Missouri said if you are in the 22% or 24% tax bracket, you might look at filling up the bracket by converting as much as you can to a Roth. “if you’re in one of those smaller brackets, and you’ve got the wiggle room, work with your adviser,” he says.
Contributions to traditional IRAs are tax-deferred, meaning you don’t pay taxes until you make withdrawals. Contributions to Roth IRAs are made after tax, which means the money grows tax free and withdrawals are made tax free. So, a major tax strategy is to convert traditional IRAs to Roth and pay the taxes now, so you won’t have to pay them later in retirement.
“The best times to ever do a Roth conversion are when tax rates are low, and market values of the investments are low,” Alison points out. “Because right now we know the stock market is down about 15%. Now, we know the stock market goes in cycles, it goes up, it goes down, it’s going to go back up again at some point in the future. We just don’t know how long into the future that will be.”
“And so, if I had, let’s say $100,000 in my retirement account last year, there’s a good chance that $100,000 is only worth $85,000 today,” he says. “I would rather be taxed on $85,000 than $100,000. “One idea is to convert that $85,000 today to a Roth, pay tax on that $85,000. And now when the stock market does recover, all that recovery is going to happen in my Roth IRA. So, all that future appreciation is going to be completely income tax free.”
- Make HSA contributions
The Health Savings Account limits increases to $7,750 for 2023 for families; $3,850 for singles in 2023. The $1,000 catch-up for individuals 55 and older remains the same.
“Those are fantastic because you can you get triple tax deferral benefits,” says McGraw, “it’s a pre-tax deduction when you fund it, it grows tax-deferred and if you use it for qualified medical expenses, then you don’t pay any taxes on the gains.”
- Qualified charitable distributions
Retirees were offered some relief when the Congress approved the Secure Act 2.0 as part of the giant appropriations bill. That legislation increased the age when seniors must begin withdrawing money for their retirement accounts to 73 from 72.
But for those who still must make the withdrawals but don’t need the money, Qualified Charitable Distributions may be the answer. Account holders can have the RMD sent directly to the charity of his or her choice, get the benefit of the tax deduction and without the tax consequences of the withdrawal.
“You could look at potentially front load your donations for five years, say, and take a take a huge deduction in one year rather than spreading them out over five,” McGraw says. “Working with your advisor, you’d be able to figure out if that is a strategy that would reduce the amount of taxes you pay and maximize your deductions.”
Rodney A. Brooks is the former deputy managing editor/Money at USA TODAY. His retirement columns appear in U.S. News & World Report and Senior Planet.com. He has written for National Geographic, The Washington Post and USA TODAY. The author of “Fixing the Racial Wealth Gap,” Brooks has testified before the U.S. Senate Special Committee on Aging. His website is www.rodneyabrooks.com.
Your use of any financial advice is at your sole discretion and risk. Seniorplanet.org and Older Adults Technology Services makes no claim or promise of any result or success.
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