Don't pay any more in taxes than you have to!
You don't want to pay any more in taxes than you have to. That means taking advantage of every strategy, deduction and credit you’re entitled to. It's important to evaluate your tax situation now, while there's still time to affect your bottom line for the following tax year.
Timing is Everything
Consider any opportunities you have to defer income to next year. For example, you may be able to defer a year-end bonus, or delay the collection of business debts, rents and payments for services. Doing so may allow you to put off paying tax on the income until next year. If there's a chance you'll be in a lower income tax bracket next year, deferring income could mean paying less tax on the income as well.
Similarly, consider ways to accelerate deductions into the following year. If you itemize deductions, you might accelerate some deductible expenses like medical expenses, qualifying interest or state and local taxes by making payments before year-end. Or you might consider making next year's charitable contribution this year instead.
What if you'll be in a higher tax bracket next year?
If you know you'll be paying taxes at a higher rate next year (say, for example, that an out-of-work spouse will be reentering the workforce), you might take the opposite track. Consider whether it makes sense to try to accelerate income into the current year, and to postpone deductible expenses until the following year.
Factor in the AMT
Make sure to factor in the alternative minimum tax (AMT). If you're subject to AMT, traditional year-end maneuvers, like deferring income and accelerating deductions, can have a negative effect. That's because the AMT—essentially a separate federal income tax system with its own rates and rules—effectively disallows a number of itemized deductions.
AMT Triggers
You're more likely to be subject to the AMT if you claim a large number of personal exemptions, deductible medical expenses, state and local taxes, and miscellaneous itemized deductions. Other common triggers include home equity loan interest when proceeds aren't used to buy, build or improve your home, and the exercise of incentive stock options.
Landscape Has Changed for Higher-Income Individuals
Most individuals will pay federal income taxes based on the federal income tax rate brackets (10%, 12%, 22%, 24%, 32%, 35% and 37%)¹. In the case of qualified dividends, these are taxed the same as long-term capital gains, as of 2022, individuals in the 10% to 15% tax bracket are still exempt from any tax. Investors who fall in the middle brackets—25%, 28%, 33%, or 35%—pay 15% at most in capital gains².
The top marginal tax rate (37%) applies if your taxable income exceeds $539,900 in 2023 ($693,750 if married filing jointly, $323,926+ if married filing separately). Your long-term capital gains and qualifying dividends could be taxed at a maximum 20% tax rate if your taxable income exceeds $492,300 in 2023 ($553,850 if married filing jointly, $276,900 if married filing separately, $523,050 if head of household)³.
Additionally, a 3.8% net investment income tax (unearned income Medicare contribution tax) may apply to some or all of your net investment income if your modified AGI exceeds $200,000 ($250,000 if married filing jointly, $125,000 if married filing separately)⁴.
High-income individuals are subject to an additional 0.9% Medicare (hospital insurance) payroll tax on wages exceeding $200,000 ($250,000 if married filing jointly or $125,000 if married filing separately)⁴.
IRAs & Retirement Plans a Key Part of Planning
Take full advantage of tax-advantaged retirement savings vehicles. Traditional IRAs and employer-sponsored retirement plans such as 401(k) plans allow you to contribute funds on a deductible (if you qualify) or pre-tax basis, reducing your 2023 taxable income. Contributions to a Roth IRA (assuming you meet the income requirements) or a Roth 401(k) aren’t deductible or made with pre-tax dollars, so there’s no tax benefit for 2023, but qualified Roth distributions are completely free from federal income tax, which can make these retirement savings vehicles appealing.
For 2023, you can contribute up to $22,500 to a 401(k) plan ($26,000 if you’re age 50 or older) and up to $6,000 to a traditional IRA or Roth IRA ($7,000 if you’re age 50 or older). The window to make 2023 contributions to an employer plan typically closes at the end of the year, while you generally have until the April tax return filing deadline to make 2023 IRA contributions⁵.
Required Minimum Distributions
Once you reach age 72, you're generally required to start taking required minimum distributions (RMDs) from traditional IRAs and employer-sponsored retirement plans (special rules apply if you're still working and participating in your employer's retirement plan). You have to make the required withdrawals by the date required--the end of the year for most individuals--or a 50% penalty tax applies⁶.
It wasn't all that long ago that the retirement-savings landscape was shaken up. Among other things, the original SECURE Act, which was enacted in 2019, extended the age at which you must start taking RMDs from 70½ to 72. That was a big boost for many seniors, who can now keep money in their tax-free retirement accounts a little longer. But that wasn't enough help for retirees in the eyes of many lawmakers. So, as soon as the ink was dry on the SECURE Act of 2019, a few key members of Congress began planning additional legislation to help more people save for retirement and hold on to their money longer in retirement. Those efforts resulted in the SECURE 2.0 Act of 2022⁷.
¹https://www.investopedia.com/terms/m/marginaltaxrate.asp
²https://www.investopedia.com/ask/answers/12/how-are-capital-gains-dividends-taxeddifferently.asp#:~:text=In%20the%20case%20of%20qualified,at%20most%20in%20capital%20gains
³https://www.irs.gov/taxtopics/tc409
⁴https://www.irs.gov/newsroom/questions-and-answers-on-the-net-investment-income-tax
⁵https://www.irs.gov/newsroom/taxpayers-should-review-the-401k-and-ira-limit-increases-for-2023
⁶https://www.irs.gov/retirement-plans/retirement-plans-faqs-regarding-required-minimum-distributions
⁷https://www.kiplinger.com/retirement/new-rmd-rules
