Tax Planning for the New Year Ahead

December 11, 2023 Author: Tess Downing, MBA, CFP®, Complete View Financial

Tax Planning

With a new year on the horizon, it is important to create a strategy for your taxes and mend any regrets you had in the past year. Regarding taxes, the new year is a fresh start and an opportunity to start your finances on the right foot.

To Itemize or Not to Itemize

For 2023, the standard deductions are $13,850 for single filers, $27,700 for joint filers, and $20,800 for heads of household. People who are 65+ may be eligible for a higher standard deduction amount.

You will benefit from itemizing if you have deductions that exceed the standard deduction amount. However, with the doubling of the standard deduction and some reductions, more taxpayers will benefit from the standard deduction.

With deductions, the most important factor is documentation, especially for charitable organizations. For these types of organizations, you must have a receipt from the recipient organization for any donation above $250.

If you use personal financial software and make accurate or realistic entries, you can estimate your 2023 tax liability (or refund) as soon as the year ends. That estimate will likely be a worst-case scenario, as your tax professional can help find ways to reduce your taxable income. Estimating aims to determine whether or not you are close to the threshold for itemizing deductions. If you are, you can start getting your records together before you visit your tax preparer.

Maximize Your Tax Deferrals

The federal government loves to use taxes as a policy tool. A benefit of this taxation-as-policy idea is the various tax deferral items that emphasize the importance of retirement savings. This created defined plans, mainly the 401(k), IRA, and HSA, to help with rising health insurance deductibles.

If you have an option for a 401(k), the 403(b), or a 457 plan, these should be your number one choice for retirement savings. There are two reasons for this:

  1. Deduction limits are higher than with IRAs
  2. Most plans offer an employer match

Some younger people find it hard to max out 401(k) contributions early in their working careers due to lower salaries, student loans, and family costs. This is understandable, but it is important to contribute as much as you can afford to gain the maximum employer match.

If you don’t have access to a 401(k), start an IRA. Roth IRA contribution limits phase out for high-income taxpayers, however, there is a tax planning technique you can use to help. The “backdoor Roth” uses after-tax dollars to make a nondeductible contribution to a traditional IRA, which is then converted to a Roth.

Know the Benefits of a Health Savings Account

With the Affordable Care Act comes the prevalence of high-deductible health plans. You are most likely eligible to contribute to a Health Savings Account (HSA).

If you’re more familiar with the original Flexible Spending Account, the HSA has many advantages. In comparison, your HSA balance can roll over to the following year whereas FSA funds have to be used by year-end. Also, HSA contributions can change amounts at any time during the year, but FSA contributions maintain the fixed level chosen at the beginning of the year.

The most important difference between these plans is that while an employer owns an FSA, you own your HSA. This makes it fully moveable if you decide to change jobs.

The main requirement for an HSA is participation in a high-deductible health plan. If you decide to switch to a plan that does not qualify, you can maintain your current HSA, but you can’t contribute to the plan during any time that a high deductible health plan doesn’t cover you.

Regardless of your overall tax category, you should speak to a financial advisor today to determine what changes you can make to optimize your tax liability.