Ways to Reduce Your 2023 Taxes in 2024

We kindly ask you to please complete this brief survey after you read the article to provide any feedback you may have or to suggest any future topics that you would like to see us write about. Completion of this survey will enter you into a giveaway of Financial Consulate merchandise.

There are several strategies you can consider that can minimize your tax liability for the year 2023 when filing your return in 2024. This article will discuss those various strategies that could benefit you this tax season.

Contributing to Traditional Individual Retirement Accounts (IRA)

It’s important to know who is eligible to make a tax-deductible IRA contribution. There are various situations that make you eligible. These include if you do not participate in a company plan, if one spouse is not in a company plan and you are Married Filing Joint (MFJ) adjusted gross income (AGI) is below $218,000, if both spouses participate in a company plan but your AGI is below $116,000, or if you are filing a single return and participate in a company plan but your AGI is less than $73,000. Another situation which would make you eligible is if you are Married Filing Separate (MFS) and your AGI is less than $10,000. In addition, you must have earned income, third party sick pay, or receive taxable alimony. If you meet any of those requirements, contributing to a Traditional IRA could lower your taxable income.

You may be thinking, “Well, if I have a Roth IRA, why would I want to contribute to a Traditional IRA?” It all depends on your percentage of savings, cliff vesting, and phase out taxes. In addition, if you plan to move to a lower income tax state in retirement, a Traditional IRA contribution would make sense. We encourage you to work with an accountant or your Financial Planner to determine if this strategy is beneficial for your situation.

Contributing to Roth Individual Retirement Accounts

Though contributions to a Roth IRA provide no immediate tax benefits, such contributions allow for substantial long-term benefits. If you have a low rate now and know that your income will continue to grow and be higher in retirement or later in your career, contributing to your after-tax Roth IRA allows that money to grow tax-free forever. Alternatively, if you plan to move to another state in which income tax will be higher than your current state, Roth contributions make the most sense.

However, keep in mind that there are eligibility requirements to be able to make a Roth contribution. For a couple who are MFJ, your AGI must be below $218,000. For Single filers, your AGI must be less than $138,000, and for those who are MFS, your AGI must be below $10,000. There is no impact from having or contributing to your company retirement plan. Requirements are strictly based on AGI. In addition, you must have earned income to be able to contribute, just like a Traditional IRA. Again, consult your accountant or Financial Planner if you have any questions.

Health Savings Accounts (HSA)

A Health Savings Account is an account that allows you to contribute to it on a pre-tax basis to use in the future for qualified medical expenses. To be able to contribute to an HSA, you must have a High-Deductible Health Insurance Policy (HDHP), and you must not be on Medicare. There are no earning requirements or limits. The best way to make contributions to your HSA is through payroll deductions; however, if you’re not able to do this, you have until April 15^th to make contributions. Any contributions made lower your taxable income.

There are various benefits to using an HSA besides the immediate tax benefit. You can pay for any medical expenses or bills on a tax-free basis. There is no timeframe for how long the money needs to be in the HSA before you can withdrawal it and use it. You can invest the funds within the HSA and any earnings the account makes can be withdrawn tax-free at any point. HSAs provide a great, additional way to save for retirement.

Simplified Employer Pension (SEP)

For business owners, an SEP provides a simplified method to make contributions towards their employees’ retirements as well as their own. Like many other retirement accounts, there are eligibility requirements. The business owner must have business-related income or a small consulting practice. SEPs are solely funded by employer contributions. Employers must contribute to all employees’ SEPs. For S-Corporations, employers’ contributions to each employee’s SEP for a year cannot exceed the lesser of 25% of that employee’s compensation for the year or $66,000 for 2023 ($69,000 for 2024). For Sole Proprietorships and Partnerships, employers’ contribution is the lesser of 25% of net income after 50% deduction of self-employment tax and pension contribution or the same dollar amount listed in the last sentence. There is typically no cost to establish or maintain an SEP.

SEPs can have a huge impact for your employees and your own retirement savings. An employer can make these contributions up until the filing date of the return (typically April 15^th) or the extension filing date (October 15^th). Keep in mind that contributions to an SEP can reduce the income that qualifies for a Qualified Business Income deduction. As always, consult a professional for specifics.

Individual 401(k) Profit Sharing

If you have a business in which you have no other employees besides yourself or your spouse, consider opening what is called a Solo or Individual 401(k) Plan [i401(k)]. There are no age or income restrictions to open an i401(k); however, you must be a business owner with no other employees besides yourself and your spouse, if applicable. One major benefit to an i401(k) is the ability to make both employee and employer contributions. For the employee contribution, you may contribute around 90% of earnings up to a max of $22,500 for 2023. If you are over age 50, you can make an additional catch-up contribution of $7,500. For S-Corporations, you can make a combined employee and employer contributions of 25% of salary or $66,000 for 2023, whichever is less. For a Sole Proprietorship or Partnership, you can make 25% of net income after 50% deduction of self-employment tax and the pension contribution.

You have until your tax filing deadline to make both the employee and employer contributions. This is great for someone who may not have the funds available to make the previous years’ contributions until the next year. There are some costs involved in setting up and maintaining an i401(k) plan, so it’s always best to consult with a professional for guidance.

Opportunity Zone (OZ) Fund

Many readers may not have heard of this tool. An Opportunity Zone is an economic development tool that allows individuals to invest in distressed areas in the United States. The goal is to create economic growth and jobs in low-income communities while providing tax benefits to those that invest. Anyone with a capital gain can invest in an OZ if that gain is realized within the last 180 days. Those with business sale gains on a K-1 can invest in an OZ up to 180 days from the end of the year that those gains were realized.

The main benefit of investing in an OZ is that it will defer tax impact until 2026. Any money that is returned will be 100% tax free. In addition, there are many great projects out there that will greatly benefit the community they are targeting. However, it is important to understand the risks associated with OZ funds like liquidity and concentration risks, among others. If this is something you are interested in exploring, please reach out to your Financial Consulate Financial Planner.

Many of these strategies can have a large impact on your tax return. Unfortunately, the government requires that you have these strategies completed and file your returns by April 15^th every year. There is an opportunity to file a tax extension to October 15^th, but many clients want their tax returns done by the original filing deadline. There is lots to be done between February 1^st to April 15^th every year, so it’s important you talk with your advisor prior to this time so that you have ample time to plan and discuss your specific situation.

Financial Consulate aims to help lessen the worry and burden of wealth management and enhance financial wellness so our clients can pursue relationships and true fulfillment. Choose the professionals at Financial Consulate as your Certified Financial Planners™ (CFP®) to take advantage of our educational, ethical approach to financial planning. Our services are comprehensive, including tax planning, investment planning, retirement planning, estate planning, and more. We operate completely independently and offer fee-only services to keep your vision in line with our recommendations at all times. While we have offices in Hunt Valley, Maryland, Fernandina Beach, Florida, and Gettysburg, Pennsylvania, we serve clients across the nation. To begin your partnership with a trustworthy wealth advisor, please contact Financial Consulate today.