As the new year begins, you can become preoccupied with how you’ll carry out your plans, such as increasing your savings account balance and exercising regularly.
Since the filing date is April, you might need to pay more attention to taxes. Even if you’re not prepared to start planning for taxes in January, if you can lawfully do so, you’re eager to use strategies that could lower your IRS bills in 2023 than you did in 2022, as tax evasion carries severe penalties from the IRS.
This article discusses six tax strategies that could lower your IRS Bill in 2023.
Tax evasion is the deliberate underpayment or non-payment of taxes. The IRS can impose monetary fines and even jail time for tax evasion. However, using strategies that could lower your IRS bills to minimize tax burden and increase after-tax income is lawful.
The six tax strategies that could reduce your IRS Bill in 2023
1. Max out savings strategy that comes with a tax break
Cash should be kept in a savings account to collect interest, and investments should be made in a brokerage account to increase wealth. However, there are no tax advantages with these accounts.
On the other hand, several tax benefits are available if you make it a point to save for retirement in a standard IRA account or 401(k). First, a percentage of your income will be tax-exempt, thanks to your investment. Let’s assume that in 2023 you contribute $6,000 to your IRA. The IRS won’t be able to take any of the $6,000 in wages.
Additionally, you won’t have to pay capital gains tax on returns from investments that you place in an IRA or 401(k). Instead, those taxes will be postponed until retirement, so you won’t need to be concerned about them. Contrarily, gains made in a brokerage account are taxed in the year earned.
2. Take losses in your brokerage account to equalize gains and ordinary income.
You may own a stock in your brokerage account that has underperformed since you purchased it. Tax-wise, it might be advantageous for you to sell that stock at a loss. First, you can deduct capital gains from losses in your brokerage account. However, you can use that loss to offset up to $3,000 of regular income if you don’t have any capital gains or if it surpasses your gains in a given year. Therefore, you reduce your IRS bill either way.
3. Invest in tools for freelance gigs or your small business
You might be considering investing in tools or equipment if you run a small business, are self-employed, or have a side gig that you conduct on a freelance basis. If you have strong reason to think that your income will rise in 2023, you should make those accounting purchases and claim the related deductions, as doing so could function as a tax write-off.
4. Asset Location
One of the effective strategies that could lower your IRS Bill in 2023 is asset location or rearranging your investments to reduce taxable income. Investments that produce interest income should be kept outside retirement accounts, while those that produce capital gains and qualifying dividends should be kept inside.
5. Deductible Retirement Plan Contributions
If you have a high salary and are in the 32% or 35% tax bracket, making deductible contributions to retirement plans makes a lot of sense. Why? Your tax bracket will probably be lower when you retire and start taking withdrawals, between 12% and 24%. If you can deduct money today at a rate of 35% and pay tax tomorrow at 12%, you’ll save a lot.
6. Take IRA Withdrawals
Though you are older than 59, even if you are not compelled to, you might consider taking IRA withdrawals during your low-income years. Here’s why this is possible.
Some retirees have more deductions than income after including itemized deductions like mortgage interest and medical costs. When it does, it may be a terrific opportunity to take money out of retirement accounts and pay tax at the lower rate of 12% or 22%.
As a substitute, many retirees adhere to conventional wisdom and let tax-deferred funds grow until they are compelled to take required minimum distributions (RMDs) for the year in which they turn 72 (or 70 12 if they do so before January 1, 2020). If you wait until 72, the RMD might be so significant that the additional income would move you into a lower tax bracket. You can avoid paying an additional 10% to 15% tax on withdrawals later on by taking withdrawals in years where your taxable income is modest.
The earlier you build strategies that could lower your IRS Bill, the better, even though January may not be the most popular month to concentrate on tax-related issues. These actions might result in a smaller tax obligation in 2023 and more money for you to the bank.
What are your opinions now that you have read about six tax strategies that could lower your IRS bill in 202? Please drop your views in the comment box, and don’t be shy about asking about tax strategies that could reduce your 2023 IRS bill.