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Many of you may be looking at your business plans for 2024. Being forward-looking is great, but it’s also wise to look back at 2023 to determine what your 2023 tax will look like. You may be able to reduce your 2023 tax bill with some proactive actions before the end of 2023.
Here we will discuss current tax topics you may want to consider as well as some actions you may want to take before Dec. 31.
Unlike past years, we don’t have massive changes to the tax code in 2023. Yet we can still present some interesting considerations.
Caveat: This is not tax advice, simply ideas that you can use to help grow wealth. Please consult with your tax preparer as there are qualifiers and specific due dates to implement. Plus, the ultimate consideration, will this have a positive impact on your personal situation?
Tried-and-true, year-end tax planning ideas
If you had a low-income year
Consider setting up a Roth IRA and converting IRA or 401k funds into the Roth IRA
This will cost some tax, but if you are at the lowest tax rates, just fund enough to bring your income to the top of that rate. After the Roth IRA matures for five years, and you reach the appropriate retirement age, you can take out the funds as you need them without any tax impact.
Defer income into 2024, and accelerate expenses into 2023
If you itemize, try to gang up medical expenses into one year. You may also try to do the same with charitable contributions.
If you are over age 70.5, utilize a Qualified Charitable Distribution (QCD) from your IRA to make charitable contributions
The QCD can be applied to your Required Minimum Distribution. This allows you to possibly avoid moving into a higher tax bracket. You are not required to pay tax on those IRA funds used to fund the QCD.
Reconsider in-home office as a deduction
You must use your home as an office and not have another office available for use. But if you qualify, you can opt for the simplified method of calculating home office expenses. This method allows you to use a rate of $5 per square foot up to 300 square feet, yielding a deduction of $1,500.
However, if you use more than 300 square feet for a home office, the standard computation method may yield a better deduction.
Consider your direct expenses such as utilities, household cleaner and security system. Then review your indirect expenses, such as property tax, interest and depreciation. Compute the business use square footage, and apply this to compute the deduction.
Consider contributions to an IRA, Simple IRA or self-employed 401K
Each of these plans allows you to defer increasing amounts of contributions. The beauty of these investments is that they reduce your tax while they grow tax-free for your retirement.
Also, you are able to deduct up to $66,000 in the self-employed 401k annually, depending on your earned income. However, there are limitations, so please review with your tax preparer.
New tax planning ideas
If you are a high-income earner, you may not be able to contribute to a Roth IRA. However, you may employ a backdoor Roth to maximize your 401K or IRA contributions. This involves making a non-deductible contribution to an IRA. Because the contribution is not tax-deductible, you can then convert the IRA contribution to a Roth without any tax impact.
You can also consider setting up a mega backdoor Roth 401k. The 401K plan you participate in must allow non-deductible IRA contributions. If you are interested in this, confirm that your plan allows this.
If it doesn’t and you control the plan, check with your third-party administrator to see if your plan can be amended to accommodate this benefit.
Many tax professionals believe the maximum that can be contributed to a 401K is $22,5000 if you are under 50 and $27,500 if you are older than 50. This is not true. The $22,500 and $27,500 limitations are the maximum tax-deductible amounts. However, the backdoor Roth allows you to make a non-deductible amount to an IRA. Then you can convert this to a Roth without tax consequences.
Residential energy credits are back on the table for 2023. The Energy Efficient Home Improvement Credit is effective Jan. 1, 2023, and it brings a $1,200 annual tax credit. The credit could potentially be pushed to $3,200 if you can incorporate the Residential Clean Energy Credit and the Solar Credit. However, there are some interesting requirements attached to this, so see the IRS FAQ.
Clean energy vehicle credits are $7,500. When all else fails, buy a new car. This year in addition to depreciation or lease payment deductions, there are new EV credits to consider.
These are just a few tax planning ideas for 2023 and perhaps could waterfall over to 2024 to provide additional tax benefits.
Amy Chorew is an active Realtor involved in investment properties and listing well-staged homes in Connecticut. Since 2008, Amy has been on the national speaking circuit teaching industry professionals about technology and sales strategies to help improve their business. Connect with her on LinkedIn and Instagram.
Maeda Palius has been a practicing CPA for 40 years. Her CPA firm focused on helping small and medium enterprises become more profitable and help the owners grow personal wealth. Connect with her on LinkedIn.
