As we approach the final month of 2023, experts suggest there is still an opportunity to cut your tax bill or increase your refund.
With just a few weeks remaining, it’s important to consider simple strategies that can make a difference. Whether you want to maximize deductions or explore tax credits, taking action now can positively impact your financial situation.
Generally, if you pay more in annual taxes or withhold more than you owe, you usually receive a federal refund.
As of October 27, the IRS reported that the average refund for 2023 is $3,054. So, if you’ve overpaid your tax bill, there’s a good chance you might be eligible for a refund.
“Begin sorting your tax-related papers today,” advised Akeiva Ellis, a certified financial planner and co-founder of The Bemused, a financial coaching service in the Boston area.
“Delaying until April may cause undue stress,” she added. So, taking proactive steps now to organize your documents can help ease the tax season pressure.
So, let’s explore some straightforward ways to increase your refund or decrease your tax bill.
1. Optimizing 2023 401(k) Contributions
With only a few pay periods left in 2023, some employees might have a chance to boost pretax 401(k) contributions, lowering their adjusted gross income.
It’s a potential strategy worth considering before the year ends.
In 2023, you can contribute up to $22,500 to your 401(k), and if you’re 50 or older, an additional $7,500 is allowed.
However, a 2023 Vanguard report reveals that only 15% of participants maximized employee deferrals in 2022.
Consider these figures when planning your 401(k) contributions for the current year.
Ellis emphasized the significance of this, particularly if you’re not maximizing employer matching funds or could benefit from lowering your taxable income.
If you tweak your 401(k) plan deferrals now, the adjustment might take effect before you receive a year-end bonus.
This proactive approach could trim your earnings while simultaneously bolstering your retirement savings.
2. Itemized Deductions Over the Standard Deduction
Taxpayers choose between the standard deduction and total itemized deductions, opting for the larger amount.
Itemized deductions cover charitable and medical expenses, state and local taxes, and more. The Tax Cuts and Jobs Act 2018 significantly increased the standard deduction, leading to fewer filers itemizing.
In 2023, the standard deduction is $13,850 for single filers and $27,700 for married couples filing jointly.
Robert Dietz, the national director of tax research at Bernstein Private Wealth Management in Minneapolis, noted,
“Even among our wealthier clients, a considerable number no longer itemize deductions,”
This reflects the broader trend away from itemizing, influenced by changes in tax laws.
3. Bunching Deductions and Assessing Income Bracket Movements
One solution to surpass standard deduction thresholds is “bunching deductions,” according to Dietz. It involves consolidating expenses like charitable donations into a single year.
While non-elective medical costs may be challenging to manage, bunching charitable donations, particularly through donor-advised funds, is a common strategy.
These funds provide an upfront deduction and serve as a charitable checkbook for future gifts.
Before implementing an end-of-year strategy that increases your income, Dietz suggests assessing if you can afford to “move up the income tax brackets.”
This usually involves a tax projection to determine how much additional income you can comfortably accommodate within your current bracket. It’s a cautious approach to avoid unexpected tax bills.
This strategy is applicable, for instance, when contemplating a year-end partial Roth individual retirement account conversion or handling required minimum distributions from an inherited IRA, according to Dietz.
Understanding your tax bracket is crucial when deciding whether to postpone income, like a bonus or capital gains, into the following year, such as 2024.
.This knowledge aids in making informed decisions about income deferral strategies.
4. IRAs and Health Savings Accounts for Reducing Tax Bill
While the majority of tax planning should be finalized by December 31, there are still a few opportunities to reduce your tax bill between January 1 and the federal tax deadline. If you’re facing a cash shortage, consider postponing these actions until early 2024.
- You can make pretax IRA contributions until the federal tax deadline, allowing for up to $6,500 ($7,500 if you’re 50 or older) for 2023, potentially qualifying for a deduction. Verify your eligibility for the IRA tax break before proceeding.
- Consider making health savings account contributions, allowing you to save up to $3,850 (or $7,750 for family plans). Certified public accountant Louise Cochrane points out that this provides a “triple threat” of tax breaks — an upfront deduction, tax-free growth, and tax-free withdrawals for qualified medical expenses. It’s a valuable strategy for maximizing tax advantages.