Tax Planning Strategies to Lower Your 2023 Tax Bill

Some financial challenges are out of your control. It is hard to combat inflation when you do not have control over the soaring costs of many goods and services. There is also little you can do to halt interest rates from rising or stocks from declining.

Though, you do have more control than you may realize when it comes to another personal financial pain point: your taxes. Here are 4 ways you can lower your 2023 tax bill.

1. Boost Tax-Deductible Retirement Savings

   Consider front-loading yearly 401(k) contributions to snap up stocks and bonds at potentially lower prices if you have surplus cash flow. Ramping up your pre-tax retirement account paycheck deferrals reduces your Adjusted Gross Income (AGI).

   Maximum employee deferrals to defined contribution plans, such as 401(k)s and 403(b)s, increased to $22,500 for 2023 from $20,500.* This 10% bump is the largest inflation adjustment in 20 years.** If you are 50 or older, you can stash away an extra $7,500 this year for a total employee contribution of $30,000.

   The amount income earners can direct to a deductible Individual Retirement Account (IRA) also jumped from $6,000 for the 2022 tax year to $6,500 for the 2023 tax year. The IRA catch-up limit remains $1,000, meaning those aged 50 and older can sock away a 2023 tax year contribution of $7,500.
   
   

2. High Inflation May Help Keep Your Income Taxes Lower – Plan Accordingly

   Some aspects of higher inflation may be beneficial, including a 7% inflation adjustment to the current year’s income tax bracket thresholds.*** Meaning you can earn more income in 2023 before catapulting into the next higher tax bracket.

   Estimate your 2023 taxable income now to understand how close you are to the tax bracket thresholds. You can plan ahead to trim taxable income and fall into a lower projected tax bracket.
   
   

3. Leverage Tax-Loss Harvesting to Slash Tax Bill

   Tax-loss harvesting is another technique to consider when trying to lock in possible tax savings after a steep slide in stocks or bonds. Take advantage of tax-loss harvesting by selling some stocks or other assets that have dropped in value, while buying others to remain invested in the current market. The realized losses can be used to offset capital gains taxes.

   If the capital losses exceed annual gains, you can use the remainder to offset up to $3,000 of ordinary income, such as wages, from federal tax. Any losses left over can carry forward to future tax years to offset capital gains or ordinary income.

   If you wait until year-end to sell losing investments, you may miss market declines. Reach out to a qualified tax preparer and CERTIFIED FINANCIAL PLANNER™ professional to see if tax-loss harvesting makes sense for you.
   
   

4. Bunch Charitable Gifts With a Donor Advised Fund (DAF)

   It has become more challenging to claim a deduction for charitable donations. Many taxpayers will not itemize write-offs due to the higher $13,850 standard deduction for single filers and $27,700 standard deduction for married couples filing together for 2023.

   If you give yearly, you may consider “bunching” these donations with a Donor Advised Fund (DAF). Establishing a DAF enables you to make gifts, immediately qualify for a charitable tax deduction, and then give grants to IRS-qualified 501(c)(3) public charities over time.

   The most tax-effective manner to fund a DAF is by contributing highly app

Bonus: Long Term Strategy - Convert Traditional IRA Assets to a Roth IRA

If you want to think beyond 2023, the recent stock market decline has made the Roth IRA conversion more appealing for many who want to save on taxes in the future in this historically low tax rate environment. If you have a pre-tax IRA, you can convert some or even all of those funds to a Roth IRA.

A market downturn enables investors to convert more assets to a Roth IRA now and enjoy tax-free growth, and possible tax-free distributions in the future. This could raise your taxes in 2023 but could potentially save you a lot of money long term.

Note that the extra income from Roth IRA conversions may come with potential unintended ramifications, such as Medicare premium and capital gains tax rate increases. Seek the guidance of qualified professionals to evaluate whether a Roth conversion is beneficial for your situation.

Explore the tax planning opportunities that may be available to you with the assistance of a CERTIFIED FINANCIAL PLANNER™ professional. Find your CFP® professional on LetsMakeAPlan.org.

* IRS, Retirement Topics - Catch-Up Contributions

** Hube, Karen. “Act Now to Trim Your 2023 Tax Bill. Here are 7 Things You Can Do.” Barron’s. 20 February 2023.

*** Picchi, Aimee “IRS changed its tax brackets for 2023. Here's what it means for your taxes.” CBS News. 13 February 2023.