Your taxes are filed (or extended). You may feel relieved. Now one of the most important periods of the year begins. No, I am not speaking of baseball in full swing. I am referring to the planning process to reduce your 2023 income tax burden based on your knowledge gained from the past year’s tax implications.
By using a proactive planning strategy, you may find that you are more confident and comfortable with the tax filing season. It is much less stressful when you have an idea of the amount of tax owed. The reason for such trepidation during tax time is that most individuals spend no time in the planning process and simply hope for the best outcome. As we say in our business, hope is not a strategy for success.
Let us put a game plan together that will help you gain confidence that your assets are working for you and not against you. First, one of the largest assets of most families is their residence. What can be done with a home that is tax efficient? Consider the full payment of your property taxes every other year so that you can “bunch” up the deduction to increase your itemized deductions. Of course, one caveat would be the limitation placed on taxes within your Form 1040 Schedule A, but most people may find room for additional deductions in this area.
In the most recent tax law passed by Congress, an individual may make certain energy efficiency improvements to his residence and take a tax credit – not deduction – for the expenditure. Instead of bunching the improvements into one year, the tax credit may benefit you over multiple years by performing some of the improvements each year. This approach will help you manage your cash flow and obtain valuable credits against your current and future years tax liabilities.
The second largest asset of a family may be their investment portfolio. By taking advantage of contributions to an employer plan or, if a plan is not offered to you, by contributing to a self-employed plan or IRA, you may uncover significant tax savings each year. When planning your operating budget for the year, consider a line item that isolates the contributions to tax-deferred plans so that you may capture efficiency with your tax liabilities.
If you have not filed your tax return for 2022, you may have opportunities to reduce your liability after the close of the filing season. Consider a SEP (Self-Employed Pension Plan) for a strategy of tax reduction. This plan will allow a contribution of up to $61,000, or 25% of net earned income, whichever is lesser, and you have until the filing of your return or the extended due date to fund the account. This is a potential windfall for many self-employed individuals!
Another overlooked asset for most families is the investment in a qualified electric vehicle. In 2023, the IRS allows an income tax credit of $7,500 to qualified individuals who purchase a vehicle that meets the criteria for the credit. The credit for electric vehicles is quite an incentive to consider one of these automobiles.
Do not plan your entire life around the impact taxes play in our world. Rather, take opportunities to gain tax benefits in the transactions and assets you are going purchase to meet your family’s needs. It becomes a win-win scenario!
By taking a few minutes each year to set and define goals that help your family lower their tax burden, you will begin to experience greater cash flow and confidence in your abilities to control your future. If you wish to start a plan that helps you gain more net worth and lower your tax burden each year, seek out a Certified Financial Planner™ professional. Take leadership in the tax planning process and reap a tremendous benefit for your family. As Peter Drucker so eloquently stated, “Management is doing things right; leadership is doing the right things.”
