With less than two months until 2023 taxes are due, there’s still plenty of time to reduce your bill or maximize your refund, advisors say. It is also the perfect time to think about reducing your load by 2024.
First, it’s important to make sure you have all the documents you’ll need to submit, advisors say: They’re W2s and 1099s, yes, but depending on your situation, also 1099-INT (for interest payments), 1099-G (for payments unemployment) and SSA-1099 (for Social Security payments), to name just a few. It is also important to gather all the necessary documents as soon as possible.
“Waiting until the last minute can lead to unnecessary stress and potential mistakes,” says Ashton Lawrence, CFP with South Carolina-based Mariner Wealth Advisors.
From there, let’s review the big changes for 2023, Lawrence suggests. Virtually all tax changes and benefits related to COVID-19 were not in effect last year, meaning your refund could be very different than in recent years. Additionally, the standard deduction, tax brackets, and retirement contributions have changed.
Then you are ready to start. Here are some additional tips from financial advisors to simplify filing and maximize your refund. (And don’t miss Fortune(The other tax season coverage.)
1. Maximize your retirement accounts for 2023
If you haven’t already, there’s still time to contribute to a traditional IRA or SEP and reduce your taxes. Each year, you have until the filing deadline (April 15, 2024 this year) to maximize your contributions.
Last year, the maximum for a traditional IRA was $6,500 ($7,500 for people 50 and older), while the maximum for SEP IRAs, used by some business owners, is much higher: 25% of the compensation or $66,000, whichever is less.
“These accounts can offer tax-deferred growth on top of pre-tax contributions that can set you up well for retirement and save you big on taxes right now,” says Bryan Cassick, CFP at California-based Warren Street Wealth Advisors.
Just be sure to classify your contribution as a contribution from the previous year; Otherwise, your IRA provider will likely classify it as a current-year contribution. You also have until April 15 to max out a Roth IRA for 2023; That won’t reduce your tax bill now, but it can help you boost your savings.
All that said, you can also start planning for 2024. Although you can’t replenish your 401(k) contributions by 2023, you can get an idea of whether it would be advantageous to contribute more this year to reduce your tax burden next year.
“Increasing 401(k) contributions can help reduce taxable income for the future year,” Lawrence says. “Understanding your situation well can help determine the most advantageous way to proceed.”
For 2024, the most you can contribute to a 401(k) as an employee is $23,000 (between employee and employer contributions, the total is $69,000) and $30,500 for those age 50 and older.
2. Contribute to a health savings account
Like an IRA, you also have until April 15, 2024 to contribute to your health savings account, or HSA, by 2023. Individuals can contribute up to $3,850, while families can save $7,750 (those Ages 55 and older can contribute an additional $1,000.) ).
Financial planners love HSAs because they offer incredible tax advantages. Contributions reduce your taxable income and you can then invest the contributions, which grow tax-free. Finally, withdrawals are also tax-free, as long as they are used for qualified medical expenses. Planners refer to this as a triple tax advantage.
Unlike flexible spending accounts, you can roll over your savings in an HSA from year to year, which can be helpful as additional retirement planning.
But not everyone qualifies for an HSA: To have one, you need to be enrolled in a high-deductible health plan.
3. Be sure to report all income, including savings account interest.
The IRS classifies the interest earned on your savings as earned income. That means you technically have to report it on your tax return, even if it’s just a few dollars.
That could trip up people who aren’t used to reporting requirements. The bank or financial institution that holds your savings accounts (or certificates of deposit (CDs), or money market funds) must send you a Form 1099-INT detailing the interest you earned during 2023. You won’t necessarily have to pay taxes, but you will have to report them. . Everything is the same.
“With the low rates of recent years, the tax was minimal,” says Rob Schultz, a certified financial planner and wealth manager in California. “But with higher rates in 2023, many people may not plan to get as big of a 1099 for their interest income on their savings.”
4. Consider a Roth IRA Conversion
If you’ll receive a raise in 2024, or if your income in 2023 was lower than this year, it might be smart to consider a Roth IRA conversion, says Thomas Lucas, CFP at Orlando-based Moisand Fitzgerald Tamayo. .
A Roth conversion is when you convert your traditional IRA to a Roth IRA, which is very useful for people who make too much money to make direct contributions to a Roth. When you convert, you’re basically going from a pre-tax vehicle to an after-tax vehicle, meaning you’ll pay taxes on the money now at your current rate, and it will grow tax-free later. That’s why it’s smart to do it when your income is lower and you’re still in a lower tax bracket.
Once you convert, you’ll enjoy all the benefits of a Roth IRA: tax-free withdrawals in retirement and no required minimum distributions over your lifetime. Since this process is irreversible, it is smart to speak with a financial professional before taking this step to learn all the pros and cons of your individual financial situation.
“Your goal should be, over the course of your life, to pay taxes when you’re in low tax brackets and to defer income when you’re in high tax brackets,” Lucas says.
5. File electronically
The quickest way to get any refund due is to file electronically, using tax software or the IRS site, and deposit the refund directly into your bank account. When you do this, the IRS says it usually takes about 21 days to get the refund, depending on the agency’s bandwidth and whether you completed everything correctly or not.
Filing electronically, whether through a tax preparer like TurboTax or with a professional, makes filing season easier. It’s easy to forget things if you fill out paperwork by hand, but the software is more likely to find credits or deductions you would have missed. The software should also ensure that you have completed everything correctly and that the IRS does not reject your return.
Finally, receiving your refund electronically is actually safer than receiving a paper check in the mail, which can be stolen or lost in transit. Stay up to date on the status of your refund by using the agency’s online tracking tool.
6. Report crypto transactions accurately
The IRS classifies cryptocurrencies as property, meaning you don’t pay taxes when you buy or hold the asset, but rather when you sell it, trade it, or use it to buy something else. Any business activity must be reported on your tax return.
It can be a tedious process, depending on how active you were last year. But it’s important, because the IRS is on high alert for illegal activity.
“The IRS is closely monitoring these transactions, so it is crucial to keep detailed records of all cryptocurrency-related activities to avoid penalties,” says Lawrence.
On your Form 1040, you will see a yes or no question that asks: “At some time during 2023, did you: (a) receive (as a reward, prize, or payment for property or services); or (b) sell, exchange or otherwise dispose of a digital asset (or a financial interest in a digital asset)?”
Checking “no” means you are done; Checking “yes” requires an additional form. You will need to itemize your sales, trades, etc., and then calculate your capital gain or loss, reported on Schedule D. If you only purchased cryptocurrency last year, you can check “no.”
And of course, you must report any crypto income if you received it in exchange for a service, for example. The IRS has a detailed FAQ page with much more detail about cryptocurrencies.
7. Check your withholdings
If you unexpectedly owe taxes, it’s probably time to check your withholding for future years, Lucas says. He advises using the IRS tax withholding estimator, which will pre-populate a W4 form that you can give to your employer’s human resources department.
“Have your W4 adjusted,” Lucas says. “This will help avoid unnecessary penalties for underpayments.”
This also works the other way around: If you receive a large refund, it might also be wise to change your withholdings. In theory, you don’t want to owe the IRS anything come tax time and get nothing in return; Receiving a large refund means you are paying extra money to the IRS for no reason. That amount could be better spent throughout the year, whether you invest it, save it, or put it toward other accounts or goals.
That said, some people simply like to be able to count on receiving a large sum of money once a year. If that’s you, then you don’t necessarily need to change anything. Just make sure you know the pros and cons of both sides.
