With 2022 taxes behind us, you’d probably much rather focus on your summer plans than think about next year’s taxes. But if you owed money this year (especially if you owed more than you were expecting) it’s time for some strategy. So, before you forget your tax preparer’s phone number, take some time to plan so next year’s taxes will be a little less … well … taxing.
The problem is, many people discover too late just how high their tax burden is. Once you find yourself in March or April of 2024, there will be very little that even the most talented accountant can do to minimize your tax bill. Starting your 2024 tax planning now can give you enough time to spread out the tax-saving opportunities.
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You don’t need to tackle everything all at once. Just put these ideas on your radar to tackle throughout the year.
Boost Your Retirement Savings
There’s no easier way to lower your tax liability than contributing more to your retirement savings. Any amount that you contribute to a tax-deferred account such as your 401(k) or 403(b) lowers your taxable income. Let’s say you earn $80,000 and you contribute 15% of your income, or $12,000. That makes your taxable income $68,000. Pile on enough pre-tax contributions and you might even find yourself in a lower tax bracket.
I always recommend clients work towards saving at least 15% of their income. But I recognize that for many people, that’s easier said than done. Saving for retirement is a heavy lift. Just know that any amount you can squeeze out of your income now for this goal will help. Even an extra $100 or $150 per pay period or monthly will compound into a sizable amount over decades.
Use Flexible Spending Accounts
Contributing to a flexible spending account (FSA) lets you put aside pre-tax dollars for your healthcare spending. In 2023, FSA maximums will rise to $3,050. Just be careful that you’re actually spending the amount you decide to contribute because it’s a mostly use-it-or-lose-it benefit with only a small opportunity for rollover. Here’s a full list of what you can spend your FSA on.
There’s also a dependent care FSA, which lets you use pre-tax money to pay for childcare. You can set aside up to $5,000 (if you are single or married filing jointly) through your employer to cover the costs of childcare for dependents under 13. This includes money for daycare, preschool or summer day camp (but not overnight camp). Just be sure to get copies of the invoices you paid, including the camp’s tax information and file it away in a digital folder. This way, you’ll have everything you need to get reimbursed when the time comes. And remember, the dependent care FSA is a combined benefit, so even if both you and your spouse have a dependent care benefit at work, you can only set aside $5,000 together.
Explore Tax Loss Harvesting
If you suffer an investment loss in 2023, you may be able to save on taxes through a strategy called tax loss harvesting. You can sell the investments and realize the loss, then use that loss to offset gains elsewhere in your portfolio. If you still have losses left over, you can hold on to them indefinitely to offset future gains. Even better: You may be able to use up to $3,000 of your losses against ordinary income on your taxes.
What should you do with the money from the investments you sold? You can repurchase the exact same securities, as long as you wait 30 days to comply with the wash sale rule. I recommend that my clients do something different, though, because I don’t think they should be out of the market for a month. Instead, I suggest they purchase similar investments—but not the exact same ones. This way they’ll get the tax benefit of the loss, but still keep their asset allocation on track.
Make Your Home Energy-efficient
While most of these tax saving ideas have been around for a while, the next few are new, thanks to the Inflation Reduction Act, or IRA, which passed last July. The legislation included a number of items to help you save on taxes when you make energy efficient purchases.
For starters, the law now gives you a 30% credit (capped at $1,200) when you make home improvements to boost the energy efficiency of your home. If your improvements include heat pumps, heat pump water heaters or biomass stoves, your tax credit could go as high as $3,200. This is in addition to the tax credits of up to 30% that are already in place for adding solar, wind, and geothermal equipment to your home.
Tax credits are more valuable than tax deductions because they reimburse you dollar for dollar, so you’ll be able to lower your tax bill by up to $3,200. However, in order to get these credits, you must first spend the money, then claim the credit on your tax returns next year.
Your state might also offer tax benefits for making climate friendly upgrades to your home, so be sure to check into what may qualify where you live.
Drive an Electric Car
Likewise, if you’ve been considering buying an electric vehicle, this is a good year to do it. The rules around the tax credits for EVs are a bit complicated and some people might not be able to claim the credits, but in general you can get a tax credit of up to $7,500 off the price of an EV.
The exact amount of the credit is based on where the vehicle’s components came from and where it was assembled. Also, only cars with a manufacturer’s suggested retail price of less than $55,000 and SUVs/pickups costing less than $80,000 will qualify for the tax credit. Here’s a complete list of the vehicles that qualify.
There are a few income restrictions on who can claim the tax credit. If you’re single and have a modified adjusted gross income of more than $150,000, you can’t claim the credit—same goes for married couples filing jointly who have a MAGI of more than $300,000. Heads of households must have a MAGI below $225,000 to take the credit. In addition, some previously owned clean vehicles may also qualify for a tax credit of up to 30% of the sale price (capped at $4,000).
While these tax credits are in place for now, I always caution people that laws can change if a new administration takes over. If you have the money and were planning to make home improvements or buy an electric vehicle, act sooner rather than later.
Planning Today Can Make For a Happier 2023 Return
I know you’ve probably already turned your attention to your upcoming summer vacation. But put a few tax saving strategies in place now. (Trust me, it will make the next tax filing season a little less painful!)
More Tax Tips from HerMoney:
- 17 Tax Filing Tips for Women Who’ve Had a Life Change
- When To Do Your Taxes Yourself or Hire an Expert
- What Is Adjusted Gross Income? 11 Tax Terms Explained
For more practical tips on taxes, saving, budgeting, investing and more, subscribe to HerMoney for a free weekly rundown of our top tips!
