Reduce Your 2023 Income Tax Bill

Take action now to reduce your 2023 income tax bill – part one

reduce your 2023 income tax bill

For many people, 2023 will be a confusing year to plan for taxes due to various issues. These include erratic markets, rising interest rates that are stabilizing, and notable modifications to the regulations governing retirement planning. You still have time to put year-end tax preparation techniques into place, which might lower your annual income tax burden, even though there is still much uncertainty. As 2023 draws to an end, consider these actions to reduce your income tax bill.

Manage your itemized deductions

In 2023, heads of households will deduct $20,800, married couples filing jointly will deduct $27,700, and single filers will deduct $13,850. Those levels are higher because fewer people are itemizing their deductions due to the Tax Cuts and Jobs Act (TCJA). However, “bunching” certain expenses could make you more eligible for more itemized deductions.

Bunching is the timing of deductible expenses to amass in a particular tax year and surpass the standard deduction. Probable contenders consist of:

Medical and dental expenses that exceed 7.5% of your adjusted gross income (AGI)
Mortgage interest
Investment interest
State and local taxes
Casualty and theft losses from a federally declared disaster
Charitable contributions

It’s important to remember that there have been discussions in Washington about capping the value of itemized deductions, possibly at 28%. Maximizing the value of such deductions while you can is advisable. This concept may resurface if new tax legislation is prompted by the expiration of numerous TCJA provisions at the end of 2025.

Pay yourself, not the IRS

Generally speaking, you should maximize your annual contributions to health savings accounts (HSAs), 529 plans, regular IRAs, 401(k) plans, and other savings vehicles that can lower your taxable income. 2023’s limitations are:

401(k) plans: $22,500 ($30,000 if age 50 or older)
Traditional IRAs: $6,500 ($7,500 if age 50 or older)
HSAs: $3,850 for self-only coverage and $7,750 for family coverage (those 55 and older can contribute an additional $1,000)
529 plans: $17,000 per person (or $34,000 for a married couple) per recipient without implicating gift tax (individual states set contribution limits)

The ability to transfer excess funds to the beneficiary’s Roth IRA starting in 2024 (subject to certain limits and regulations) makes contributing to 529 plans even more alluring.

Harvest your losses

This year’s volatile financial markets can present a chance to harvest “loser” investments—those with a value lower than their cost basis—and use the losses to balance out your gains. You can use the excess to offset up to $3,000 of ordinary income. Then, you may carry forward any residual losses if your losses exceed your capital gains for the year.

However, you must adhere to the so-called wash-sale regulation. When you purchase “substantially identical” investments within 30 days of the selling date, the rule prohibits you from deducting the loss.