Tax season can be a daunting time for many people, especially if you are not familiar with the rules and regulations that apply to your situation. However, with some planning and preparation, you can reduce your tax liability and avoid penalties and interest. Here are some tips from an experienced certified financial planner on how to prepare your 2023 tax return.
- Maximize your contributions to retirement accounts. One of the best ways to lower your taxable income is to contribute as much as you can to your retirement accounts, such as 401(k), IRA, or Roth IRA. These accounts offer tax benefits, either by deferring taxes until withdrawal (traditional) or by avoiding taxes altogether (Roth). The contribution limits for 2023 are $20,500 for 401(k) and $6,000 for IRA, with an additional $1,000 catch-up contribution for those 50 or older.
- Defer payouts. If you have the option to receive income in 2023 or 2024, you may want to defer it to the later year, depending on your tax bracket and expected income. This way, you can postpone paying taxes on that income until the following year. For example, if you are expecting a bonus or a commission, you may ask your employer to pay it in January 2024 instead of December 2023.
- Tax-loss harvesting. If you have investments that have lost value in 2023, you may want to sell them before the end of the year to realize the loss and offset your capital gains. This strategy is called tax-loss harvesting and can help you reduce your tax bill on your investment income. However, be careful not to violate the wash-sale rule, which prevents you from buying back the same or substantially identical security within 30 days of selling it.
- Pay your liability on time. If you owe taxes to the IRS, make sure to pay them by the due date, which is usually April 15 of the following year. If you fail to do so, you may incur penalties and interest on the unpaid amount. You can also request an extension to file your return, but this does not extend the time to pay your taxes. If you cannot pay your full liability by the due date, you may apply for an installment agreement or an offer in compromise with the IRS.
- Know when you need help. Preparing your tax return can be complicated and time-consuming, especially if you have multiple sources of income, deductions, credits, or special circumstances. If you are not confident or comfortable doing it yourself, you may want to seek professional help from a certified financial planner or a certified public accountant. They can help you optimize your tax situation and avoid mistakes that could cost you money or trigger an audit.
These are some of the tips that can help you save money and avoid stress on your 2023 tax return. Remember that planning ahead and being organized can make a big difference in your tax outcome. Happy filing!
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