The 2023 Tax Planning Guide

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It’s that time of year again: time for year-end tax planning. With the end of 2023 coming fast, the time to act is now. In this article, we’ll look at the moves you can make to optimize your tax situation in 2023 as an individual taxpayer.

Itemized Deductions

Flexing your timing on itemized deductions is a solid strategic move. It can help you shift to a bigger itemized deduction in 2023 versus 2024 (but not both). This can be advantageous if you expect to be in a higher tax bracket in one year compared to the other. Key itemized deductions to consider are home interest, state and local taxes, charitable deductions and medical expenses.

Electric Vehicles

If you are in the market for a new car, consider buying an electric vehicle (EV) to save some taxes as well. Many new EVs can get you a credit of up to $7,500 and used versions up to $4,000. The credit is limited based on the cost of the vehicle, with more expensive models ineligible for the tax credit. Generally, the MSRP of a sedan cannot exceed $55,000, and SUVs, trucks and vans cannot be more than $80,000. 

In addition to the price limit on the EV itself, the credit is limited by taxpayers’ income levels. Married couples’ modified gross income cannot be more than $300,000 to get the credit on a new EV and $225,000 for a used version. Single taxpayers are capped at $150,000 for a new version or $75,000 for a used EV.

One important distinction here is that if you buy an EV in 2023, you’ll need to claim the credit via your tax return, which means you won’t get the benefit right away. In 2024, however, you can choose to transfer the credit to the car dealer when you buy the vehicle and pay less as a result immediately. So, if you plan to buy now or in early 2024, it may be better to wait if you have the choice.

Home Improvements

There are two tax credits you can get related to making “green” upgrades to your home. The first is the residential clean energy property credit, which is installing alternative energy systems such as solar, wind, geothermal, etc., giving you a credit of up to 30 percent of the materials and cost of installation. The second is the energy-efficient home improvement credit. This applies to smaller upgrades like boilers, central air-conditioning systems, water heaters, windows, etc., that meet qualifications for specific energy efficiency ratings. The credit is for 30 percent of the cost, with $1,200 yearly maximum (from all upgrades).

Charitable Donations

If you are considering making charitable donations, consider donating appreciated property, like stocks or mutual funds, where you have unrealized gains. This way, you’ll get to deduct the full amount of the fair market value without having to sell and pay taxes on the gains first.

Beware Required Minimum Distribution (RMD) Rules for IRAs

The penalty for failing to take your RMD dropped from 50 percent down to 25 percent with the Secure 2.0 Act in 2023, but it is wise to avoid the still hefty penalty. The general rule is that taxpayers 73 and older must take annual payouts, and there is a specific calculation behind it based on your age and account balance. You can also be subject to RMDs at a much younger age if you inherited an IRA. If you don’t feel comfortable making this determination, it’s best to check with your CPA or financial advisor to ensure you withdraw the right amount.

Max Out Retirement Plans

The deadline to fund workplace 401(k) plans is December 31, 2023, while 2023-year IRA contributions are allowed up until April 15, 2024. Taxpayers can contribute up to $22,500 in a 401(k) ($30,000 if age 50 or older); and $6,500 for IRAs ($7,500 if over 50). 

Capital Gains and Tax Loss Harvesting

The capital markets have seen a volatile year, and interest rates are at highs not seen in quite some time. This may create situations where tax loss harvesting is advantageous.

Generally, if you have losses in some securities, understand that you can take losses against positions with gains up to the number of gains you realize, plus a maximum of $3,000 against other income. Excess losses are carried forward to future years. So, if you have a combination of winners and losers in your portfolio, consider tax loss harvesting to lower your tax bill.

Beware of the wash-sale rules, however. The wash-sale rules forbid you to sell and then repurchase “substantially identical” securities within 30 days of the sale on loss positions. One nuance here is that cryptocurrencies are not subject to the wash-sale rule as of yet.

Increase Your Withholdings

If you expect to have a hefty tax bill, then it may be wise to have additional amounts withheld from your paycheck or make an estimated payment. This can help you avoid a penalty for underpayment of taxes. As long as you prepay via tax payments or withhold a minimum of 90 percent of your 2023 total tax bill or 100 percent of what you owed for 2022 (110 percent if your 2022 AGI exceeded $150,000), you are clear of the penalty.

Conclusion

As we prepare to enter the final month of 2023, now is the time to take a look at your financial and tax situation to see if there are any moves you can make to minimize your 2023 tax liabilities and maximize your wealth.


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Author: Service2Client

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