It's tax time. So let's get ready. 1099's will start appearing in your mailbox this month. But be aware that a corrected 1099 may show up in March if you have a brokerage account. It happens. And don't even get me started on K1's, as they have been known to appear in your mailbox as late as April, long after you have filed. The tax deadline to file or extend this year is April 18th. If you are like me and typically go for the extension, you will have until October 16th to file your 2022 tax return. Remember that if you expect to owe money after you file your return, you still have to pay money in by April 18th to avoid penalties and interest (even if you file an extension). Also, first quarter estimated tax payments for 2023 are due on April 18th if you have self-employed income or typically pay quarterly estimated taxes because you are not withholding enough.
Yes, it is all somewhat confusing. But you got this. Just like anything that has to do with your finances, investments, expenses, etc.. you need to spend some dedicated time on it. Do it on your own or work with a qualified tax advisor, but make the time for planning and preparation and it will surely pay off. Just don't wait until April 17th to start working on it! You know who you are.
This tax season you may notice some slight changes. Nothing too dramatic, but I suspect most people will have a slightly higher tax liability. Although the standard deduction increased slightly in 2022, which most people use to offset their income, the IRS eliminated or reduced most of the Covid related tax credits and stimulus payments that led to higher refunds. The ability to deduct some charitable deductions while simultaneously taking the standard deduction also expired. With all of the stock volatility and selling that occurred in 2022 you may see an increase in your realized capital gains if you did not offset them with losses. Higher interest income may also appear on your return if you invest in money markets or high-interest savings accounts. Wages have been increasing for most taxpayers, which may also contribute to a higher adjusted gross income. My message to you: Don't be surprised if you owe some taxes or receive a much smaller refund this tax filing season. So plan accordingly.
And while you are planning for this new potential tax impact, it is also the best time to begin planning and taking steps to manage your taxes for your next tax season. After all, there is not much to do once the year is up except cross your fingers and hope you remember to record all of your deductions. Proper tax planning begins right now and should be done consistently throughout the year.
Here is my list of 10 tax considerations you should be mindful of all year:
Retirement contribution limits have increased (by a lot). Figure out if you can contribute more of your paycheck into your 401k, simple IRA, or other qualified plans. If you are over 50, you can contribute even more.
You may be able to contribute to a Roth IRA now even though you couldn't before. The IRS increased the income phaseout limits, which may have disqualified you from being eligible in the past.
Consider doubling your real estate tax payments in the same year to try and itemize your deductions. Most people with a mortgage cannot deduct the interest because the standard deduction has increased substantially. So, you can increase your itemized deductions by paying for more of your real estate taxes, medical expenses, or charitable intentions all in the same year.
IRA owners (age 70½ and older) may benefit from directing charitable gifts tax-free from their IRA. Since most retirees claim the standard deduction, payments made to charities directly from your IRA will offset the taxable distribution dollar for dollar.
The new Required Minimum Distribution age that forces yearly distributions of certain retirement accounts has also been pushed back to age 73 this year. So defer IRA distributions if it makes sense to. This may help keep your social security checks from being taxed as well.
If you own a small business, ensure you maximize the 20% deduction for qualified business income. Determine what you should take as a salary in 2023 and potentially take the rest as a business income distribution with a tax break.
If you receive commissions, perform gig work, or sell things online as a form of income, make sure you are putting at least 25% of your revenue away for taxes. Set up a separate checking out that is designated strictly for taxes. Refrain from digging yourself into a hole by thinking you will pay the taxes later with future sales.
Plan for any significant expense that you may incur later in the year. Avoid using a pre-taxed retirement account to pay for larger expenses. If you want to buy a car for $30,000, you will have to spend over $40,000 to buy it using an IRA due to taxes.
Continuously monitor your realized gains from any trading activity or real estate sales and offset them by harvesting any unrealized losses that you may have on your balance sheet.
Consider tax-free interest money markets for your cash if your income is high. Avoid keeping too much money in savings accounts because the banks are not passing on the higher rates to you.
Feel free to reach out if you need any additional guidance or tax advice. Our team of professionals can help.
Gregg Pacitti CFP®