There may still time to reduce your taxes for 2023

As Arthur Godfrey said, "I'm proud to be paying taxes in the United States. The only thing is, I could be just as proud for half the money".

When we review our clients’ tax returns, we always take a look to see what one actually paid in income taxes for that given year.

If one is earning 500k we would expect to see a large number on the “Total Tax” line.

But sometimes I’ll see an unusually larger number than normal.?I recently saw such an issue when a distribution from a 401k plan went on the return as a taxable distribution (It turns out it was not a taxable event however, the 1099 for the distribution was coded incorrectly and the tax preparer didn’t know so an amended return was filed)

Ideally, our goal should be to minimize the amount we pay in taxes.?Note, sometimes paying more in taxes in a given year is okay if it leads to lower lifetime taxes.?When would that be the case you might ask?

Roth Conversions are a good example.?When one converts money that is in a regular IRA to a Roth IRA, they must pay taxes on the amount they convert in the year of conversion.

For example.?Brenda, age 45, working with her advisor, determines it makes sense to convert 100k of her $1 million IRA in 2023.?This 100k will be added to her income for the year and she will be required to pay taxes on this 100k. Not ideal BUT, let’s say she is in the 24% tax bracket for this conversion, she would pay 24k in taxes.?If instead she left the IRA alone, that 100k at age 75 when required minimum distributions happen, would be subject to the tax rate at that time.?Do you think in 30 years when that happens the tax rate will be higher than 24%??I’m not a betting man but if I were, I would feel there is a strong possibility.?On top of that, if the 100k is invested for the 30 years in a Roth IRA earning an average return of 7%, (NOT a guarantee. Merely an illustration.?Investments carry risks of loss and one should always seek guidance from an investment professional before investing.) that 100k could be worth about 760k.?In the Roth, it could come out tax free!?Left in the regular IRA, 100% would be taxable at current rates.

Here's an article on 4 Reasons a Roth IRA Conversion Might Not Make Sense

Okay, back to the blog.

So, what are some ways to reduce our taxable income, so our tax bill is less?

If one is working, paying less in taxes can be accomplished by contributing to your retirement plan, funding your Flexible Spending Account (FSA), if eligible, contributing to a Health Savings Account (HSA).?If one is charitably inclined, there are strategies for gifting that may be more tax advantaged than just writing a check.

Let’s break down the benefits of some of these common ways to lower your tax bite.

Contributions to a retirement plan such as a 401K, 403B, or deductible IRA

The 401K or 403B are pretty easy to contribute to.?You fill out some paperwork with your employer and they deduct the percentage you indicate on the form from your paychecks each pay period.?

For 2023, one can contribute up to $22,500 (or $30,000 if you are over 50).?So, for example, if you are 50 and your income from working is $130,000, by contributing $30,000 into your 401K, your taxable income just dropped to 100k.

Bear in mind, one can also contribute to a Roth 401k or Roth 403b in the same amounts however, by doing so, anything that goes in the Roth does not lower your taxable income today.?It can benefit you down the road in retirement but does nothing to lower your taxes today.?Speak with your Certified Financial Planner practitioner to see what is best for you.

If one meets the requirements, they can contribute to a deductible IRA and can contribute up to $6,500 a year (or up to $7,500 if over 50).?These limits aren’t as much as a 401k or 403B but if one doesn’t have access to a workplace plan, it is an option.

How do FSA’s (flexible spending accounts) and HSA’s (health savings accounts) lower your taxes?

An FSA allows one to set aside a certain amount that could be used for medical expenses, dental work, or even eyeglasses.?Since the money comes from your paycheck pretax, you aren’t paying taxes on the amount contributed to the FSA.?There are certain rules that must be followed so talk with your HR person or reach out to me.

An HSA allows one to put money aside for current of future medical expenses BUT the first hurdle one must jump over to qualify is their health insurance must be a high deductible health plan.?If not, an HSA is not an option.?If one is applying for Medicare soon, they are also not allowed to contribute.?The beauty of the HSA if you qualify is, the money goes in tax free, it grows tax free, and it comes out tax free.?It can be better than a Roth IRA which does not give you a tax deduction going in.

Lastly, there are other strategies one can use before year end to lower their tax burden. For example, there are different ways one can give to charity if desired that can be more beneficial than simply writing a check.

One could give appreciated stock, open a Donor Advised Fund (DAF) which allows you to make a large contribution (and receive a tax deduction) and then control which charities and when they receive the gift, or even gift directly from your IRA if you are over 70 1/2

It is important however, to speak with a qualified professional to ascertain if these ideas are right for you.

When it comes to taxes, there is a lot to consider.?

Thinking about retirement or feel you are paying too much in taxes??I'm here to help.?Feel free to reach out to me?if you have any questions by going HERE.

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Financial Planning Solutions, LLC (FPS) is a Registered Investment Advisor.?Financial Planning Solutions, LLC (FPS) provides this blog for informational and educational purposes only. Nothing in this blog should be considered investment, tax, medical, or legal advice. FPS only renders personalized advice to each client.?