Thinking about your tax planning throughout the year can help avoid a surprising tax bill. Some tax saving ideas may need funding or financial planning, so being aware and prepared will help you benefit from these tax approaches. Here are several strategies to consider which can help shrink your tax bill for any tax year on the horizon.
Consider life events
Contemplate whether any of the following key events may take place in 2023, as they may have potential tax implications:
Purchasing or selling a home
Refinancing or adding a new mortgage
Getting married or divorced
Incurring large medical expenses
Changing jobs
Welcoming a baby
Manage your retirement
One of the best ways to reduce your taxable income is to use tax beneficial retirement programs. Now is a good time to review your retirement account funding. Here are the contribution limits for 2023:
401(k): $22,500 ($30,000, Age 50+)
IRA: $6,500 ($7,500, Age 50+)
SIMPLE IRA: $15,500 ($19,000, Age 50+)
Defined Benefit Plan: $66,000
Look into credits
There are a variety of tax credits available to most taxpayers. Take a look at those you currently use and determine whether you qualify for them again next year. Here are some worth reviewing:
Child Tax Credit
Earned Income Tax Credit
Premium Tax Credit
Adoption Credit
Elderly and Disabled Credit
Educational Credits (Lifetime Learning Credit and American Opportunity Tax Credit)
Assess your income
Forecast how your 2023 income will compare to your 2022 income, then review your most recent tax return and find your effective tax rate by dividing your total tax by your gross income. Then apply that rate to your new income. This will give you a rough estimate of next year's tax obligation.
To avoid getting stuck with an unexpected tax bill, consider scheduling several tax planning sessions throughout the year. Remember, some tax saving ideas may require funding on your part. It is best to identify them now so you can save the cash necessary to take advantage of them throughout 2023 and over the coming years.