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Tax Season News and Survival Tips

It’s not easy to keep up with complex tax laws that always seem to be changing, much less figure out how they might affect you personally. Even so, it’s important to consider the potential impact of taxes when making many types of financial decisions.

The IRS automatically adjusts the standard deduction and income tax brackets annually for inflation. The rate of inflation rose to 40-year highs in 2022, so the 7% increases for 2023 are the largest since these adjustments began in 1985.1 The standard deduction is $13,850 for single filers in 2023 (up $900 from 2022) and $27,700 for married joint filers (up $1,800).

The filing deadline for 2023 federal income tax returns is April 15, 2024, (April 17 in Maine and Massachusetts, due to local holidays). Even though the 2024 tax year is well underway, there may still be time to take steps that lower your tax liability for 2023.

Understand “marginal” tax rates

U.S. tax rates increase at progressively higher income levels or brackets (see table). If your taxable income goes up and moves you into a higher bracket, the resulting tax increase might not be as bad as it may appear at first glance. For example, if you and your spouse are filing jointly for 2023 and have a taxable income of $110,000, you are in the 22% tax bracket. However, you will not pay a 22% rate on all of your income, only on the amount over $94,300.

Determining the value of certain deductions also depends on where your income falls in the tax brackets. Using the same example, a $10,000 deduction would reduce your income from $110,000 to $100,000 and theoretically reduce your tax liability by $2,200 (22% x $10,000). For a $20,000 deduction, you would have to calculate the amount of the deduction that falls in the 22% and 12% brackets: 22% x $15,700 + 12% x $4,300 ($3,454 + $516 = $3,970).

Although it’s helpful to know your marginal rate, your effective tax rate — the average rate at which your income is taxed (determined by dividing your total taxes by taxable income) — may offer a better way to gauge your tax liability.

Deduct large casualty losses

Wildfires, tornadoes, severe storms, flooding, landslides. The United States was struck by a record number of billion-dollar catastrophes in 2023.2 If something you own was damaged or destroyed by a disaster, and your loss exceeds 10% of your adjusted gross income (AGI) plus $100, you may be able to claim an itemized deduction on your federal income tax return. This typically applies to large losses that are uninsured or subject to a high deductible. For 2018 to 2025, a personal casualty loss is deductible only if it is attributable to a federally declared disaster.

The rules relating to casualty losses can be complicated. If you have suffered a significant loss, it may be worthwhile to consult a tax professional.

Apply for an extension

If you can’t meet the filing deadline for any reason, you can file for and obtain an automatic six-month extension using IRS Form 4868. (Otherwise, if you owe taxes, you might face a failure-to-file penalty.) You must file for an extension by the original due date for your return. For most individuals, that’s April 15, 2024; the deadline for extended returns is October 15, 2024.

An extension to file your tax return does not postpone payment of taxes. Estimate your tax liability and pay the amount you expect to owe by the original due date. Any taxes not paid on time will be subject to interest and possible penalties.

Pay yourself instead

Making deductible contributions for 2023 to a traditional IRA and/or an existing qualified health savings account (HSA) could lower your tax bill and pad your savings. If eligible, you can contribute to your accounts up to the April 15, 2024, tax deadline.

The 2023 IRA contribution limit is $6,500 ($7,000 in 2024). If you’re 50 or older, you can make an additional $1,000 catch-up contribution. If you or your spouse is covered by a retirement plan at work, eligibility to deduct contributions phases out at higher income levels.

If you were enrolled in an HSA-eligible health plan in 2023, you can contribute up to $3,850 for individual coverage or $7,750 for family coverage. (The limits for 2024 are $4,150 and $8,300, respectively.) Each eligible spouse who is 55 or older (but not enrolled in Medicare) can contribute an additional $1,000.

Avoid scams and costly mistakes

Tax season is prime time for identity thieves who may fraudulently file a tax return in your name and claim a refund — which could delay any refund owed to you. Or you might receive threatening phone calls or emails from scammers posing as the IRS and demanding payment. Remember that the IRS will never initiate contact with you by email to request personal or financial information, and will never call you about taxes owed without sending a bill in the mail. If you think you may owe taxes, contact the IRS directly at irs.gov.

The IRS has examined less than 0.5% of all individual returns in recent years, but the agency has stated plans to increase audits on high-income taxpayers and large businesses to help recover lost tax revenue. Wherever your income falls, you probably don’t want to call attention to your return.3 Double-check any calculations you do by hand. If you use tax software, scan the entries to make sure the math and other information are accurate. Be sure to enter all income, and use good judgment in taking deductions. Keep all necessary records.

Finally, if you have questions regarding your individual circumstances and/or are not comfortable preparing your own return, consider working with an experienced tax professional.

1) The Wall Street Journal, October 18, 2022
2) National Oceanic and Atmospheric Administration, 2024
3) Internal Revenue Service, 2024

IMPORTANT DISCLOSURES

The information presented here is not specific to any individual’s personal circumstances. To the extent that this material concerns tax matters, it is not intended or written to be used, and cannot be used, by a taxpayer for the purpose of avoiding penalties that may be imposed by law. Each taxpayer should seek independent advice from a tax professional based on his or her individual circumstances. These materials are provided for general information and educational purposes based upon publicly available information from sources believed to be reliable—we cannot assure the accuracy or completeness of these materials. The information in these materials may change at any time and without notice.

Securities and investment advice offered through Investment Planners, Inc. (Member FINRA/SIPC) and IPI Wealth Management, Inc., 226 W. Eldorado Street, Decatur, IL 62522. 217-425-6340.

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Year-End 2023 Tax Tips

Set Aside Time to Plan

Effective planning requires that you have a good understanding of your current tax situation, as well as a reasonable estimate of how your circumstances might change next year. There’s a real opportunity for tax savings if you’ll be paying taxes at a lower rate in one year than in the other. However, the window for most tax-saving moves closes on December 31, so don’t procrastinate.

Defer Income to Next Year

Consider opportunities to defer income to 2024, particularly if you think you may be in a lower tax bracket then. For example, you may be able to defer a year-end bonus or delay the collection of business debts, rents, and payments for services in order to postpone payment of tax on the income until next year. 

Accelerate Deductions 

Look for opportunities to accelerate deductions into the current tax year. If you itemize deductions, making payments for deductible expenses such as qualifying interest, state taxes, and medical expenses before the end of the year (instead of paying them in early 2024) could make a difference on your 2023 return.

Make Deductible Charitable Contributions

If you itemize deductions on your federal income tax return, you can generally deduct charitable contributions, but the deduction is limited to 50% (currently increased to 60% for cash contributions to public charities), 30%, or 20% of your adjusted gross income, depending on the type of property you give and the type of organization to which you contribute. (Excess amounts can be carried over for up to five years.)

Increase Withholding 

If it looks as though you’re going to owe federal income tax for the year, consider increasing your withholding on Form W-4 for the remainder of the year to cover the shortfall. The biggest advantage in doing so is that withholding is considered as having been paid evenly throughout the year instead of when the dollars are actually taken from your paycheck. 

More to Consider

Here are some other things to consider as part of your year-end tax review.

Save More for Retirement

Deductible contributions to a traditional IRA and pre-tax contributions to an employer-sponsored retirement plan such as a 401(k) can help reduce your 2023 taxable income. If you haven’t already contributed up to the maximum amount allowed, consider doing so. For 2023, you can contribute up to $22,500 to a 401(k) plan ($30,000 if you’re age 50 or older) and up to $6,500 to traditional and Roth IRAs combined ($7,500 if you’re age 50 or older). The window to make 2023 contributions to an employer plan generally closes at the end of the year, while you have until April 15, 2024, to make 2023 IRA contributions. (Roth contributions are not deductible, but qualified Roth distributions are not taxable.)

Take Any Required Distributions

If you are age 73 or older, you generally must take required minimum distributions (RMDs) from your traditional IRAs and employer-sponsored retirement plans (an exception may apply if you’re still working for the employer sponsoring the plan). Take any distributions by the date required — the end of the year for most individuals. The penalty for failing to do so is substantial: 25% of any amount that you failed to distribute as required (10% if corrected in a timely manner). Beneficiaries are generally required to take annual distributions from inherited retirement accounts (and under certain circumstances, a distribution of the entire account 10 years after certain events, such as the death of the IRA owner or the beneficiary); there are special rules for spouses.

Weigh Year-End Investment Moves

Though you shouldn’t let tax considerations drive your investment decisions, it’s worth considering the tax implications of any year-end investment moves. For example, if you have realized net capital gains from selling securities at a profit, you might avoid being taxed on some or all of those gains by selling losing positions. Any losses above the amount of your gains can be used to offset up to $3,000 of ordinary income ($1,500 if your filing status is married filing separately) or carried forward to reduce your taxes in future years.

IMPORTANT DISCLOSURES

The information presented here is not specific to any individual’s personal circumstances. To the extent that this material concerns tax matters, it is not intended or written to be used, and cannot be used, by a taxpayer for the purpose of avoiding penalties that may be imposed by law. Each taxpayer should seek independent advice from a tax professional based on his or her individual circumstances. These materials are provided for general information and educational purposes based upon publicly available information from sources believed to be reliable—we cannot assure the accuracy or completeness of these materials. The information in these materials may change at any time and without notice.

Securities and investment advice offered through Investment Planners, Inc. (Member FINRA/SIPC) and IPI Wealth Management, Inc., 226 W. Eldorado Street, Decatur, IL 62522. 217-425-6340.