No one has EVER told me they DON’T want to save money in taxes. Tax savings strategies are always a good idea to consider in your financial planning. Being tax aware is a big part of what good financial planning is all about!
Another reason to consider a little extra tax awareness NOW: in 2026, the TCJA (Tax Cuts and Jobs Act) is set to expire. At a very high level, this means we’ll likely see higher tax rates in the near future, as well as a change to the standard and itemized deductions amounts and rules. (For more in-depth information on the TCJA, read here.)
For you, that means taking advantage of lower tax rates while they are here should be a priority.
So what can a savvy taxpayer do to take advantage of these opportunities? Here are my top 3 tips:
Tip #1: Ride the Tax Brackets
“Knowledge is power” and this is true for where you stand in our tax system. Knowing where you are in our tax bracket system can give you powerful information to help you control your taxes.
The tax brackets change each year, so take a moment to look at this year’s chart. How close you are to either moving up or down into a different bracket?
If you are solidly in the middle of a bracket, this may not be an action item for you.
However, if you are close to the bottom end of a bracket, you should prioritize the things you can do to move down into that lower tax bracket. A few simple actions could save you some money that is easily missed if you are unaware of where you stand.
On the other hand, if you are close to the top end of a bracket, this becomes even more important. You’ll want to avoid things that would kick your up into the next tax bracket. You’ll also want to prioritize actions you can take to stay in your current low bracket.
What are the actions you can take? So glad you asked…
Tip #2: Max Out Contributions to Retirement Plans
Whether you do freelance work, are employed by a corporation, or have an employment set up somewhere in between, if you are reporting EARNED INCOME of just about any sort, there’s probably a retirement plan that you can put money into and save on your taxes.
Your mission is to find out what that retirement plan is and how you can contribute to it.
If you already know that, your challenge is to find out what the IRS maximum is for your plan, and aim for that as a personal savings goal.
The IRS maximum is often higher than people realize. For example, for 401(k) / 403(b) plans, in 2022, the maximum employee contribution is $20,500 if you are under age 50 and $27,000 if you are over age 50. That’s a good chunk of cash!
If you are contributing to a traditional, tax-deferred plan, that means every penny you put in means less you pay in taxes now. (Yes, you will have to pay taxes when you take the money out in retirement, so bear that in mind – but it’s a good tip if you need an extra tax break now.)
If you don’t have access to an employer plan like a 401(k) or 403(b), but you are working and have EARNED INCOME, you may be able to contribute to a traditional IRA. The limits are nearly as high (in 2022: $6000 for those under age 50 and $7000 over age 50), but every bit helps.
Finally, if you are self-employed, there are incentives for you, too! From a SEP or a SIMPLE to a Solo 401(k), several plans exist to give small business owners additional tax breaks while also saving for retirement. The contributions to these types of plans vary, so talk to one of us or your CPA for the specifics of your situation.
Tip #3: Charitable giving
If you are charitably inclined, giving some additional thought to your charitable contributions could benefit both you and the charity. This is especially true if you are in your 70s. Due to a quirk in the tax law, if you are over age 70 ½, you may make a Qualified Charitable Contribution, according to the IRS. This means you can contribute directly to a charity (or charities) from your tax-deferred plan (like your traditional IRA). The money doesn’t technically touch your hands, so you don’t pay taxes on the withdrawal. The charity receives a tax-free contribution. Win-win!
This strategy is especially effective for people who are over age 72 and subject to Required Minimum Distributions, or RMDs. You can designate your RMD as a QCD, avoid paying taxes, and satisfy the IRS requirement all in one swoop.
If you have questions about using QCDs or RMDs in your plan, please contact us or your tax advisor.
“Planning is bringing the future into the present so that you can do something about it now.” – Alan Lakein
A little bit of PLANNING can go a long way to helping you save money on your tax bill. So why wait? Take a look at your tax situation now, while you have the power to do something about it!
At Shadowridge, we are using Holistiplan to help our clients get proactive in their tax planning. Together we want to help you find possible missed opportunities, take advantage of what’s available to you, and create a roadmap for the coming year. Again, knowledge is power!
Want more than just 3 tax tips? Check out my video on YouTube for more tax savings tips and ideas. Or contact me anytime! I’d love to hear your questions.
Looking forward to a successful 2023,