With the end of the year swiftly approaching, time is running out to optimize your tax strategy and ensure you retain as much of your income as possible!
While most individuals and businesses know how important it is to be sure to take advantage of the tax incentives, credits, and deductions available to you both at a state and federal level, most can also benefit from a little bit of strategic tax planning.
Below, we offer 5 of our top tips for increasing your tax breaks and holding on to your income!
Tip #1: Calculate Your Expected Taxable Income for the Year, and Evaluate Your Tax Bracket
One of the first, critical steps in understanding how to increase tax breaks and decrease your tax burden is knowing exactly what your expected taxable income is for the year. This can be straightforward or incredibly complicated depending on whether you are single or married, employed or self-employed, and what your income sources, debts, and investments look like. Even if it is complicated and takes time or some hours invested with your CPA, this can be a critical component of tax planning that can make all the difference when it comes to tax time.
With your expected taxable income understood, you will have a baseline number to start with, and can then see where you fall in the various tax brackets. In many instances, a person’s taxable income will just barely push them into a higher tax bracket, which can be a small difference of 2% (if you are single and your taxable income is around $11,000, or $22,000 for married couples filing jointly), and as large as 10% (if you are single and your taxable income hovers around $44,725 or $89,451 for married couples filing jointly).
For a refresher on tax brackets for 2023, we have you covered.
Click Here to View 2023 Tax Brackets
Tip #2: Max Out Your Retirement Accounts (or, significantly increase contributions)
Whether you have a 401(k), IRA, or similar retirement plan, if your retirement account has tax-deductible contributions, maxing out those contributions or significantly increasing contributions can help lower your tax burden.
401(k) Contribution Limits for 2023:
| Account Type | Limit | Limit for Ages 50+ |
| 401(k) | $22,500 | $30,000 |
| Change from 2022 | + $2,000 | + $3,000 |
As limits in 2022 were $20,500 ($27,000 for ages 50+), this is a big increase: $2,000 and $3,000 respectively
IRA Contribution Limits for 2023:
| Account Type | Limit | Limit for Ages 50+ |
| IRA | $6,500 | $7,500 |
| Change from 2022 | +$500 | +$500 |
IRAs saw limits increasing $500, up from $6,000 and $7,000 respectively from what they were in 2022.
These may be tax deductible, and of course, it’s important to understand deduction limits. If you’re not sure, speak with your CPA for the most accurate information.
Tip #3: Consider The Different Methods Available for Deferring Your Income
Deferring income is somewhat of a catchall phrase, meaning that some of the methods available for deferring income are covered in other sections of this article To start, let’s just bullet out some options for income deferral:
- Contributing to a traditional IRA
- Employee Stock Options
- Health Savings Account Contribution
- Life Insurance Premiums
- NQDC (Non-Qualified Deferred Compensation Plans)
- Accelerate Your Expenses
- Postponing Year-End Invoices
- Stock Options
- Deferring Capital Gains
There are, of course, many other methods of income deferment, and income deferment is just one of the many tax planning strategies that can help you lower your tax burden, retain more of your income, and ultimately maximize tax savings.
We cannot stress enough how important it is to speak with a CPA early on to understand what your options are.
Tip #4: Boost Your Tax-Efficient Investments
Another way to reduce your taxable income is to boost your investments into tax-efficient accounts and funds. For most individuals, this means maxing out your retirement accounts, but there’s a wide range of options when it comes to tax-efficient investments.
Tax-efficient investments can include:
- 401(k)s
- Roth IRAs
- Index Funds
- 529 Plans
- Index Funds
- Individual Stocks
- Equity Index Mutual Funds
- Health Savings Accounts
- Irrevocable Trusts
- Exchange Traded Funds (ETFs)
- Tax-Free Municipal Bonds
- Treasury Bonds (more efficient at the state and local level; you’ll still need to pay taxes at the federal level)
Some less tax-efficient investments that can actually increase your tax burden can sometimes include:
- Mutual Funds
- Taxable Bonds
- Multi-Asset Funds
- High-Yield Bond Funds
- Actively Managed Mutual Funds
- Commodity Funds
- Short-Term Bond Funds
Of course, no matter what your investment is, whether it is one of the funds above, real estate, cryptocurrency, or collectibles, it’s important to understand what taxes you will owe on your investments as you’re considering how to increase your tax breaks and decrease your tax burden.
Tip #5: Know The Multitude of Options for Reducing Your Tax Burden
Part of what makes taxes so complicated both for individuals and businesses is the multitude of options for reducing your tax burden and figuring out the right options, strategies, and steps based on your income, employment, filing status, and goals.
Here are 5 More Methods (in addition to, frankly, too many to list!):
- Federal and Local Tax Incentives and Credits (energy efficient vehicle credits is a great example of this one!)
- Itemizing Your Deductions (If you’re a single filer whose expenses exceed $13,850, joint filers exceeding $27,000, or heads of households exceeding $20,800)
- Educational Expenses (like the Lifetime Learning Credit for post-secondary school, which allows you to claim up to $2,000 for tuition, fees, and supplies depending on your filing status, income, and other eligibility status)
- Charitable Contributions
- Tax-Advantaged Employer Benefits (like HSAs, 401(k)s, flex spending accounts, etc.)
If you want more information on how to reduce your tax burden, we recommend speaking with a CPA knowledgeable about your situation. When it comes to tax advising and planning, the best advice you can get is specific to your unique circumstance!
Bonus Tip: Turn to a CPA for Expert Assistance in Tax Planning
Ever wonder why it is that so many high-earning individuals seem to know all the tax loopholes? It’s truly because they typically employ teams of accountants, financial managers, and CPAs specializing in tax who spend much of their time strategizing on how to optimize income and build toward tax credits and tax breaks. Working with someone who always has an eye on the IRS’s ever-changing regulations, knows the ins and outs of tax-deferred income and investments, and spends their time helping people just like you retain as much of their income certainly has its benefits. The more you plan ahead and the more information you have about your finances and tax obligations, the more you can do along the way to ensure you aren’t overpaying in taxes. Tax planning and strategy is you #1 recourse for lowering your tax burden, holding onto your income, and finding ways to shore up your financial safety net. Most of our first-time clients save thousands in their first filing with a CPA. If you’re looking to do the same, give us a call!
Note: This information is general and not to be taken as tax advice. Always speak with a CPA before making any decisions on tax planning, strategy, and deductions.
