It’s already that time of year again, leading up to the holidays. The kids are back in school, summer fun is just a memory, and it’s time for a strategic huddle with your tax planner. This year, in particular, has been a wild ride in terms of inflation and the cost of living, and most everyone is looking for ways to lessen the sting of rising costs and create a plan for whatever 2023 may have in store.
Take Advantage of Investments
When prices climb to historical levels, as they have in 2022, higher household incomes sometimes push taxpayers into a higher tax bracket. To protect taxpayers from this “bracket creep,” the IRS makes adjustments to the tax brackets and to the retirement contribution limits each year. 2023 is expected to bring higher-than-average adjustments to these limits. With appropriate preparation, assisted by your professional tax planner, it is possible to maintain the desired standard of living while increasing the amount you set aside for investment.
Two of the most common investments that will help to reduce your overall tax burden are Individual Retirement Accounts (IRA) and 401(k) Pension Accounts. Employer-sponsored 401(k) plans often include incentives for investment and long-term employment through matching contributions. The funds designated for investment are deducted from an individual’s income before taxes are calculated, and those earnings are not taxed, provided specific provisions are met for withdrawal or rollover to an IRA.
Therefore, both Traditional and Roth IRAs can be useful tools in tax planning. For example, funds rolled over to an IRA from a 401(k) account can be invested and may avoid taxation when withdrawn, if done appropriately, for completely tax-free income. Other deposits into an IRA have limits that are adjusted each year and are made after taxation. However, if the investment income from those deposits is withdrawn according to the set rules, it can also be tax-free.
For many people, medical expenses make up a significant portion of the monthly budget, though those amounts are not always enough to warrant an itemized deduction on their tax returns. Therefore, Flexible Spending Accounts (FSAs) are an option that allows some taxpayers to set aside a portion of their income before taxes that can be used for medical, orthodontic, and childcare expenses. Planning each year to optimize the amount you set aside is a practical way to pay for medical expenses before taxes in cases where the traditional deductible minimums are not expected to be met.
For those employees enrolled in a High Deductible Health Plan (HDHP), a Health Savings Account (HSA) is another option. It’s similar to an FSA, except that the unused funds at the end of each year roll over to the next. Generally, only $550 of the funds remaining in an FSA can be rolled over to the next year according to the “use it or lose it” rule. Funds deposited into an HSA can also be invested similarly to those in an IRA, with those earnings sheltered from taxation until withdrawal. What’s more, withdrawals may not be taxable if they meet specific guidelines.
Business Entity Status
Small business owners and solo entrepreneurs may do well to get a professional opinion of their business entity status. There may be tax advantages to be reaped from a change in the way your business is organized, according to the IRS.
As the last few months of this year fly by, make sure to set aside time to plan for the upcoming tax year. It’s never too early to contact the tax planning experts at Myrick CPA to discuss the upcoming changes in the tax code. Let us help you create an optimal plan that will help you achieve your financial goals in 2023 and in the long term.