With 2022 coming to a close, many economists and investors are looking toward 2023 with trepidation. The Fed’s campaign to raise interest rates seems to have come too late. Resultingly, inflation has shown itself as sticky rather than transitory, requiring the Fed to become more aggressive to tame inflation, a trajectory many believe ends with the U.S. and world economy into a tough recession.
With the fate of the economy uncertain, households can better prepare themselves for a possible downturn by saving as much as possible on their tax bills and maximizing returns.
These helpful year-end tax returns keep more money in your pocket for when it counts the most.
Know Your Tax Bracket
As a starting point, determine your most likely tax bracket. The Tax Cut and Jobs Act (TCJA) changed the brackets to help individuals reduce their taxable income. Knowing your likely bracket, you will also know if you are close to qualifying for a lower bracket and tax rate. If so, you may see some opportunities to reduce your taxable income and benefit from a lower tax rate.
Perform a Standard Deduction Versus Itemized Deduction Analysis
The TCJA also increased the standard deduction to help lower-income Americans. Higher-income taxpayers tend to do better taking itemized deductions, in large part because of the deductibility of mortgage interest, property taxes, and other expenses.
But because the TCJA raised the standard deduction well above recent norms, many more taxpayers find themselves close to the line between the standard deduction and itemized deductions. If you are close, there may be some additional tax benefits you can claim under the itemized deduction list to put you over the top and make itemized deductions the better choice.
Do You Qualify for QBI?
The Qualified Business Income (QBI) deduction helps taxpayers by allowing deductions of up to 20% of the income from sole proprietorships, S corporations, partnerships, and qualified trusts. The 20% generally includes the deductible part of self-employment tax, self-employed health insurance, and deductions for contributions to qualified retirement plans.
The law also makes the QBI deduction available for qualified real estate investment trust dividends and publicly traded partnerships. Landlords may qualify for the deduction if they meet the safe harbor requirements or if the business qualifies for section 162 tax treatment.
Specified services businesses, such as law or health, are subject to phase-out requirements according to income level.
Retirement Account Contributions
If you can afford to increase your 401(k) contributions before the end of the year, you can save a bundle on your taxes. Also, taxpayers with traditional IRAs can take the deduction for contributions made by the tax deadline for the preceding calendar year.
Home Office Deduction
If you use your home for your business, part of its expense may be tax deductible. This deduction uses the same logic as business deductions for premises costs. The home office deduction allows you to apply up to one-third of your rent, mortgage, and utility bills against your income.
Vehicle Miles or Depreciation
With the exception of commuting miles, the IRS allows the deduction of miles traveled for business at a fixed rate. Also, taxpayers may opt for deducting the actual depreciation and expenses of running their vehicle for business purposes.
Moving Day
If you move to a new region for a job, the expenses may be eligible for a deduction based on certain limits. If possible, completing a move prior to the new year can reduce your taxes or increase your refund.
Prepayments
Consider prepaying any bills that are tax deductible. Even if you pay at the last moment on December 31st, you can take the deduction for that calendar year. For example, deductible mortgage- or health insurance payments serve as prime examples.
Tax-Loss Harvesting
Investment and regular income work differently within the tax code. In determining your taxable income, you need to subtract any losses and commissions. What remains afterward may be a positive or a negative number. If it’s negative, you owe no taxes on any investment gains. You can then purchase similar investments early in the following year.
You must sell any applicable securities by December 31st to benefit from the tax loss harvesting.
The Spirit of Giving
If you believe in the holiday-giving spirit, you may reduce your taxes for the year. Most charitable contributions are tax-deductible, allowing you to benefit directly from your good deed.
With an uncertain economic year on the horizon, it pays to save wherever you can. By limiting taxes or maximizing returns, you enhance your household balance sheet. If the oft-predicted recession never comes, then you have the extra money in your pocket to save, invest, or pay for a trip you have dreamed of taking.
Tax and Accounting Services for Your Benefit
Tax Avenger in Canton provides tax preparation and planning services that will keep you and your business on track. We also provide accounting services and bookkeeping for individuals and businesses. Let’s start with a Free Consultation to help determine your tax and accounting needs for 2023. Call today!