November 29, 2022

Tax Planning for 2023

It’s always a good time to plan for the future.
Stewart Willis

Even though we’re still working on our taxes for this year, it’s time to start thinking about taxes for next year as well. Most tax strategy happens in the current tax year, but there are some preemptive moves you can make now before we ring in the new year. Waiting until “tax season” can cause you to miss opportunities. You want to hit the ground running!

What can be done now to make next year’s taxes more favorable? Depending on your individual circumstances, you might want to consider the following ideas.

New Year’s Resolution

The first thing you should do is to make a New Year’s resolution: Be more financially organized throughout the year. Keep good records! Many don’t, and that makes it harder to discover opportunities to reduce their tax burden. 

Store your receipts and records in an easily-accessible location. Keep them organized! Don’t just shove everything into a handy shoebox. File them by category so they’re easier to find when you need to refer back to them.

The Tax Cuts and Jobs Act raised the standard deduction. That’s good because you automatically get a higher tax deduction, but it also means you have to reach a higher threshold before it makes sense to itemize. If you’re organized and keep charitable donation records current throughout the year, you can quickly determine whether you should itemize or take the standard deduction. 

If you’re not organized, you’ll have to spend a lot of time at the end of the year gathering receipts, and it may turn out to be a wasted effort if your donations don’t rise above the standard deduction. Make next year about being your own CFO; be organized and on top of your finances to make your 2023 tax season easier.

Consider Your Donation Strategy

If you’re donating to a charity, does it make sense to “bunch” your donations by giving twice as much this year and nothing the next? This giving strategy can help you realize a tax deduction that brings you over the standard deduction limits. If not, it may still make sense to make smaller donations annually. 

Consider QCDs, or Qualified Charitable Distributions. If you’re over age 72 with an IRA or you have inherited an IRA, you are must take a required minimum distribution, or RMD, from those tax-deferred retirement accounts each year whether you need the money or not.

For some, taking that distribution can put them into a higher tax bracket, causing them to owe more taxes. Instead of taking the distribution as income, you can donate it directly as a distribution to a qualified charity. This gives you a number of advantages:

  • QCDs don’t count as personal income, which can keep you out of that higher tax bracket.
  • QCDs also reduce your IRA’s balance, which can lower future RMDs and therefore taxable income in years to come.

This can be especially important in your early 70s. You can start making QCDs at age 70 ½, but don’t have to start taking RMDs until age 72. This means you can lower the value of your IRA, and therefore the amount of your RMDs before your RMDs take effect. 

Another advantage is that the charity doesn’t pay taxes on your donation. In other words, donating by distributing from a retirement account means all of the money goes to the charity, versus donating from your bank account with money you’ve already paid income taxes on.

Future-Thinking Can Be Advantageous

Properly anticipating future RMDs can open the door to other tax advantages as well. If you know you will have to take an RMD next year, and your income is low this year, it might make sense to take excess distributions this year to max out your tax bracket. 

This is an important concept. You want to aim for being near the top of the lowest tax bracket possible in order to avoid moving into a higher tax bracket the following year. By realizing extra distributions in a low-income year, you can lower your future distributions which may keep you out of those higher tax brackets. 

Don’t Wait to Start Planning

Many people start tax planning entirely too late. Some wait until March, at which point it’s too late to apply many tax strategies because the tax year is over. Others start a few months before the end of the year. That’s better, but it can still limit your options. 

At Asset Preservation Wealth & Tax, we believe the best idea is to always be looking toward the future by asking yourself, “What can I do this year that will improve my tax picture for next year?”

Stewart Willis is the founder and president of Asset Preservation Wealth & Tax, a financial planning firm in Phoenix, Arizona. Investment advisory services offered through Foundations Investment Advisors, LLC, an SEC registered investment adviser.

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