Tax Time - Tips to Cut Your Bill
The IRS announced that January 23 was the start of the 2023 tax season—or the date the IRS began accepting 2022 tax year returns. If you have yet to file, most taxpayers have until Tuesday, April 18, 2023, to submit their tax return or request an extension. Taxpayers requesting an extension have until October 16, 2023, to file. Even if you file for an extension, you are still required to pay the taxes you owe by April 18.
Is your business organized as a partnership, are you a part of a multi-member LLC, or do you own an S-Corporation? If so, you must file the appropriate business form by March 15, 2023. C-Corps abide by the traditional April 18 deadline. For most deductions, deadlines to minimize taxes have already passed. For example, you can no longer take a tax loss on the sale of an asset for tax year 2022. The same holds true for charitable contributions.
But as you prepare to file, we want to remind you that opportunities to harvest tax savings are still available.
Fund your retirement
You may contribute to an IRA and credit tax year 2022 up until April 18. To contribute to a traditional IRA, you or your spouse, if you file a joint return, must have taxable compensation, such as wages, tips, bonuses, or net income from self-employment. There are no income limits that might prevent you from contributing to a traditional IRA account. There is no age limit that would prevent a contribution to a traditional IRA. That change began in 2020.
The maximum total annual contribution for all your IRAs (traditional and Roth) combined is:
- $6,000 for tax year 2022 and $6,500 for 2023, if you're under the age of 50.
50 or older?
- You may contribute up to $7,000 for 2022 and $7,500 for 2023.
Will your contribution be fully deductible in a traditional IRA? It depends on a couple of factors. If your income is less than a certain amount or if you (or your spouse) does not have an employer-sponsored retirement plan, your traditional IRA contribution is fully deductible. If you or your spouse has a 401(k) or pension plan, the tax-deductible portion of your IRA contribution may be limited.
For the tax year 2022, if you file single and participate in an employer-sponsored plan, you may take a full deduction if your modified adjusted gross income (MAGI) is less than $68,000. No deduction is available if your MAGI is greater than $78,000. The deduction is pro-rated for MAGI between $68,000 and $78,000.
Limits rise to $109,000 if filing jointly and you participate in an employer-sponsored plan. There is a phase-out between $109,000 and $129,000. A deduction is not allowed if your MAGI is above $129,000.
If your spouse participates in an employer-sponsored plan, you receive full deductibility if your MAGI is under $204,000, partial deductibility if between $204,000 and $214,000, and no deduction if your MAGI is above $214,000. https://www.schwab.com/ira/traditional-ira/contribution-limits
While you may not be able to fully deduct your contribution, any appreciation in invested funds is tax-deferred if it remains in your IRA. Withdrawals of contributions are not taxed. How does this work? If you make a total of $20,000 in nondeductible contributions over several years and the account is worth $100,000, then 20% of a withdrawal is tax-free.
Just be sure to file Form 8606 for every year you made nondeductible IRA contributions.
Deductibility limits enhance the advantage of a Roth IRA
A Roth is available if your MAGI is less than $129,000 and you are filing as a single, and $204,000 if married filing jointly. You lose the ability to contribute to a Roth if your income is above $144,000 (single) and $214,000 (married). https://www.schwab.com/ira/roth-ira/contribution-limits
The maximum contribution is pro-rated if your MAGI is in between the limits. Roth contributions are not deductible.
HDHP & the HSA
Do you have a high-deductible health plan (HDHP)? The IRS defines a HDHP as a plan with a deductible of at least $1,400 for an individual or $2,800 for a family. https://www.healthcare.gov/glossary/high-deductible-health-plan/
If you have HDHP, you may qualify for a Health Savings Account (HSA) if your health plan is HSA-eligible. Check with your insurance company to clarify whether your health plan is HSA-eligible. You must have HSA (health savings account) eligible insurance beginning December 1, 2022, to qualify for a 2022 HSA contribution.
Contributions, other than employer contributions, are deductible on the eligible individual’s tax return. Earnings are not taxed inside the HSA, and withdrawals used for qualified medical expenses are not taxed. https://www.irs.gov/publications/p969
For 2022, you may contribute up to $3,650 for single coverage. If you have family HDHP coverage, you can contribute up to $7,300. You have until April 18 to fund your HSA for tax year 2022. If you are 55 or older, you may contribute an additional $1,000.
Triple-play for an HSA
First, funds you contribute to an HSA are deductible. Second, earnings are tax-deferred, and third, if withdrawn for any reason at 65 or older, you pay only income taxes but no penalty. It’s much like an IRA; however, withdrawals for qualified medical expenses remain tax-free, unlike an IRA. If you are HSA-eligible, consider prioritizing an HSA over an IRA.
Self-employed? An SEP may be your best bet
If you are self-employed, consider a SEP (simplified employee pension) IRA. Almost any business can establish a SEP-IRA, and contributions limits are much higher than an IRA. You may contribute the lesser of 25% of compensation for an employee (20% if you're self-employed) or $61,000 for tax year 2022. In addition, a SEP-IRA may be opened and funded up to the tax-filing deadline, which includes extensions. https://www.schwab.com/small-business-retirement-plans/sep-ira
These plans have various rules, which we can assist you with. You will be required to contribute to employee accounts when you contribute to your own SEP-IRA account, but this tax-deferred vehicle offers generous contribution options.
Don’t forget tax credits
Tax credits do not reduce taxable income. Instead, they reduce the taxes you owe. That means a $1,000 tax credit reduces federal taxes by $1,000. It’s that simple.
Tax credits that may be available to you include:
- Child or adoption tax credit
- Earned Income Tax Credit
- Lifetime Learning Credit
- Credit for Other Dependents
- Low-Income Housing Credit
- Premium Tax Credit through the Affordable Care Act
- American opportunity tax credit
The Inflation Reduction Act provides new ways to save. The Act creates or extends tax credits for wind, solar, zero-emission vehicles, energy savings, and other renewable sources. If you made energy-efficient improvements to your home last year or purchased a zero-emission vehicle, these credits may be available to you.
- Credits for new clean vehicles purchased in 2022
- Energy-efficient home improvement credit
- Residential clean energy credit
The list is not all-inclusive, and we encourage you to check in with your tax advisor or reach out to us if you have additional questions.