Your Financial Future: Plan now to reduce 2023 tax bill

We are now almost half way through 2023. While we are all excited about the prospect of attending enjoyable events as well as vacations, now is the perfect time to take steps to lower your tax bill. Most people approach taxes in a reactive manner. The year ends and they collect all of their documents to give to their tax preparer. There is little that the preparer can do except make sure you get all of the available deductions. A much better way is to be pro-active and develop a plan now to reduce your 2023 tax bill.
Have you been contributing to an IRA or 401k plan? If you start now, this will lower your income and save on taxes. If you can get an employer match, take it, as it is hard to beat free money. One thing you want to be careful about is making sure your savings have tax diversification. There are three types of tax funnels, according to the IRS: pre-tax or qualified, post-tax or non-qualified and tax preferential, such as a Roth or properly structured life insurance. Too many people end up with all of their funds in a qualified account. This is not ideal because it can cause many tax problems later. Two examples might be larger required minimum distribution (RMD), which could increase Medicare premiums, and higher taxes after the death of one spouse.
Taxes will have to go up in the future to pay for the exploding government deficit. We know taxes are scheduled to increase for most people on Jan. 1, 2026. This is when the Trump tax cut ends if it is not extended by Congress. We will automatically return to prior higher rates.
If you believe tax rates will be higher in the future, it may make sense to do a Roth Conversion now. You will have to pay income taxes on qualified money, but you can decide how and when. Why not do it when tax rates are lower? There are several different ways to do Roth Conversions. When you contribute to a qualified account, you defer paying the government taxes at that time. You invest your remaining funds into an account that grows tax-deferred until you distribute the cash. Many CPAs do not consider long-term taxes when looking at Roth Conversions. Because of this, many people convert less than they should and pay much higher taxes later.
You can manage your tax bracket for other possible tax savings. There are gifting strategies for some people that may save additional taxes. Many people do not realize that their investment choices can cause them to pay more taxes than necessary. Many proposals to change taxes are floating in Washington. While we do not yet know exactly what will change, it will affect many of us, not just the super-rich. There just are not enough of them to cover these huge deficits.
Remember for 2023, you must take your RMDs or face a 25% penalty. This used to be 50%; however, it is still a high tax rate that can easily be avoided. Be pro-active in your tax planning and you can lower your tax bill by working with a tax planning specialist.
Your Financial Future is written by certified financial planner Gary W. Boatman, MBA and CFP, who also wrote the book, “Your Financial Compass: Safe Passage Through The Turbulent Waters of Taxes, Income Planning and Market Volatility.”
If there is an area that you would like to see discussed in the column, send your suggestions to gary@BoatmanWealthManagement.com.