tax saving

9 Ways to Start Tax Planning for Next Year

 

Today is Tax Day and if you’re like me, you may have just done your taxes and realized you owe money back (or perhaps your refund was less than you expected). While many people just accept their refunds or pay what they owe, be different. Start putting things in place now so you can lower your tax bill next year. In other words, don’t just focus on tax filing, focus on tax planning. Here are a few ideas below:

 

1. Max out pre-tax retirement accounts and Roth accounts

 

Let’s start by reducing your taxable income. One of the best ways to do that is to stuff money into pre-tax retirement accounts. This means using the 401K or 403b at your job or opening a solo401K if you are self-employed. Last year, you could stuff $20,500 into retirement accounts but this year (2023) the amount has increased to $22,500 per person. Along with using pre-tax retirement accounts to save money in taxes in the current year, you can also consider Roth accounts like a Roth IRA to save money in taxes in future years. For those like me who may not be able to contribute to a Roth IRA directly due to your income, contributing to a Roth IRA indirectly via the backdoor (by contributing to a traditional IRA and then converting that money to a Roth IRA) is another good option.

 

2. Stuff money into additional tax-advantaged accounts (457b)

 

Many physicians and governmental employees have additional pre-tax accounts open to them such as a 457b or deferred compensation plan. These plans are not retirement accounts, but they do allow you to contribute as much as $22,500 a year (in 2023) into them. The money you contribute is not taxed which can save you thousands of dollars in taxes the year you contribute to it. Just be sure to contact your human resources department to see if you have the plan and are eligible to use it. Also check out the 457b plan details and ensure your employer is stable.  

 

3. Consider the use of a Healthcare Savings Account or (healthcare) Flexible Spending Account

 

A Health Savings Account (HSA) is an investment account open to those who have a high-deductible health insurance plan. As of 2023, you can put up to $3850 if you are single or $7750 if you are married (or have family members on the account). The money you contribute is not taxed and you can then invest that money which will help it grow to an even larger amount over time. You can then remove the money out of this account tax-free if used for health expenses (in the current year or during any year in the future). For those who are not eligible for an HSA (because you have a different type of health insurance plan) you can usually use the healthcare flexible spending account. This is an account that allows you to put money away (pre-tax) that you plan to use on healthcare expenses throughout the year. Unlike an HAS, you cannot invest the money in the account and it must be used within a 12-to-15-month time frame, but if you know you will have healthcare expenses (from doctor visit copays, prescriptions, and procedures) using an FSA may be beneficial and save you money in taxes as well.

 

4. Use the Dependent Care FSA

 

If you are someone with children or other dependents like aging parents that you care for, consider using the dependent care FSA. This is an account you can stuff money into each year (tax free) that you can use to pay for dependent care expenses like daycare costs for your kids or nursing home costs for your parents. The max amount you can put into this account as of 2023 is $5000 for those who are married (or $2500 for those who are single or file their taxes separately). If you are a parent who is going to spend that money anyway, you might as well save a little bit in taxes to do so.

 

5. Take advantage of deductions like charitable giving and mortgage interest

 

If you are someone who has a home or likes to give to charity or churches each year, you may have other tax saving measures open to you. If the amount that you give each year and spend on mortgage interest (not the full mortgage payment but the amount that is used to pay interest) exceeds the standard tax deduction, then it may be in your best interest to itemize your taxes. When you itemize your taxes, you are able to take advantage of other deductions in the tax code (for charitable giving and mortgage interest payments) that could save you even more money in taxes. Ask your accountant to run the numbers and see if that makes sense for you.

 

6. Tax loss harvesting

 

If you are someone who invests a decent amount of money in taxable brokerage accounts (ie. If you invest money outside of retirement accounts) then you may be able to take advantage of other deductions. As we’ve seen over the past few years, the stock market does not always go up. Sometimes it goes down. When it goes down the value of some of your investments decreases. You may be able to sell some of those investments at a loss and then use that loss on your taxes to decrease the amount you owe. (You can then buy back a similar investment at a later date) Speak to your financial advisor to determine if you have enough money in brokerage accounts to tax loss harvest and whether or not it makes sense for you to sell some of those losses to offset your taxes.

 

7. Consider changing your business structure  

 

It’s 2023 and many more people have side businesses and hobbies that bring in extra income. Perhaps it is time for you to re-think your business structure because doing so may help you save money in taxes. Many people opt to make their business an LLC, but when it comes to taxes, you still have choices. You can choose for your business to be taxed as a sole proprietor (in which you will have to pay self-employment taxes) or….you can choose for your LLC business to be taxed as an S Corporation. Choosing to tax it as a sole proprietor requires less work but if you choose an S corporation then you may be able to save money in self-employment taxes which can amount to thousands of dollars per year. Speak to your business manager or tax professional to determine if you should reconsider your business structure and how it is taxed.

 

8. Get some 1099 income

 

If you aren’t someone who wants to start an entire business or hire a tax professional, perhaps you can still use some of your side income to your advantage. You don’t have to have an official LLC or a business corporation to take advantage of some of the benefits in the tax code. As long as you have some 1099 income you can start deducting expenses that are related to that income and you can even get an employment identification number to open up a solo401K (which is a retirement account for people with side income and businesses). Opening a solo401K will allow you to stuff even more money into retirement accounts. If you make a good deal of money, you can even open a “Megabackdoor Roth account” to stuff up to $66K into retirement accounts each year as of 2023.

 

9. Restructure compensation from your job

 

If you are someone who is employed and has no desire to start a business or get side income, there are some other things you can consider to lower your taxes. One idea is for you to think of other ways to get compensation from your job in ways that are taxed differently. For example, many doctors have money for Continuing Medical Education (CME) at their jobs which is fully reimbursable. Instead of increasing your salary, maybe you ask for more CME money and fewer restrictions on how it is used so you can get thousands of dollars each year tax free to spend on electronics and courses or conferences in exciting places? If your job has a retirement match, maybe you negotiate a higher retirement match instead of a bigger salary since the money your employer puts into retirement accounts is tax free?

 

Tell me, what changes do you plan to put in place this year to reduce your taxes? Have you tried any of the ideas above?