Key Takeaways:
– The article provides tips and insights on optimizing deductions for 2023 taxes and planning for next year’s return.
– It suggests looking back at 2023 to determine what the tax bill will look like and taking proactive actions to reduce it before the end of the year.
– Some tried-and-true year-end tax planning ideas include setting up a Roth IRA, deferring income into 2024, accelerating expenses into 2023, utilizing a Qualified Charitable Distribution, and reconsidering in-home office deductions.
– New tax planning ideas include employing a backdoor Roth IRA, setting up a mega backdoor Roth 401k, taking advantage of residential energy credits and clean energy vehicle credits.
– The article also introduces the authors, Amy Chorew and Maeda Palius, who have expertise in real estate and accounting, respectively.
inman:
Sisters Amy Chorew and Maeda Palius offer tips and the latest insights so you can find out what you need to know to optimize the deductions on your 2023 taxes and plan ahead for next year’s return.
The verdict is in — the old way of doing business is over. Join us at Inman Connect New York Jan. 23-25, when together we’ll conquer today’s market challenges and prepare for tomorrow’s opportunities. Defy the market and bet big on your future.
Many of you may be looking at your business plans for 2024. Being forward-looking is great, but it’s also wise to look back at 2023 to determine what your 2023 tax will look like. You may be able to reduce your 2023 tax bill with some proactive actions before the end of 2023.
Here we will discuss current tax topics you may want to consider as well as some actions you may want to take before Dec. 31.
Unlike past years, we don’t have massive changes to the tax code in 2023. Yet we can still present some interesting considerations.
Caveat: This is not tax advice, simply ideas that you can use to help grow wealth. Please consult with your tax preparer as there are qualifiers and specific due dates to implement. Plus, the ultimate consideration, will this have a positive impact on your personal situation?
Tried-and-true, year-end tax planning ideas
If you had a low-income year
Consider setting up a Roth IRA and converting IRA or 401k funds into the Roth IRA
This will cost some tax, but if you are at the lowest tax rates, just fund enough to bring your income to the top of that rate. After the Roth IRA matures for five years, and you reach the appropriate retirement age, you can take out the funds as you need them without any tax impact.
Defer income into 2024, and accelerate expenses into 2023
If you itemize, try to gang up medical expenses into one year. You may also try to do the same with charitable contributions.
If you are over age 70.5, utilize a Qualified Charitable Distribution (QCD) from your IRA to make charitable contributions
The QCD can be applied to your Required Minimum Distribution. This allows you to possibly avoid moving into a higher tax bracket. You are not required to pay tax on those IRA funds used to fund the QCD.
Reconsider in-home office as a deduction
You must use your home as an office and not have another office available for use. But if you qualify, you can opt for the simplified method of calculating home office expenses. This method allows you to use a rate of $5 per square foot up to 300 square feet, yielding a deduction of $1,500.
However, if you use more than 300 square feet for a home office, the standard computation method may yield a better deduction.
Consider your direct expenses such as utilities, household cleaner and security system. Then review your indirect expenses, such as property tax, interest and depreciation. Compute the business use square footage, and apply this to compute the deduction.
Consider contributions to an IRA, Simple IRA or self-employed 401K
Each of these plans allows you to defer increasing amounts of contributions. The beauty of these investments is that they reduce your tax while they grow tax-free for your retirement.
Also, you are able to deduct up to $66,000 in the self-employed 401k annually, depending on your earned income. However, there are limitations, so please review with your tax preparer.
New tax planning ideas
If you are a high-income earner, you may not be able to contribute to a Roth IRA. However, you may employ a backdoor Roth to maximize your 401K or IRA contributions. This involves making a non-deductible contribution to an IRA. Because the contribution is not tax-deductible, you can then convert the IRA contribution to a Roth without any tax impact.
You can also consider setting up a mega backdoor Roth 401k. The 401K plan you participate in must allow non-deductible IRA contributions. If you are interested in this, confirm that your plan allows this.
If it doesn’t and you control the plan, check with your third-party administrator to see if your plan can be amended to accommodate this benefit.
Many tax professionals believe the maximum that can be contributed to a 401K is $22,5000 if you are under 50 and $27,500 if you are older than 50. This is not true. The $22,500 and $27,500 limitations are the maximum tax-deductible amounts. However, the backdoor Roth allows you to make a non-deductible amount to an IRA. Then you can convert this to a Roth without tax consequences.
Residential energy credits are back on the table for 2023. The Energy Efficient Home Improvement Credit is effective Jan. 1, 2023, and it brings a $1,200 annual tax credit. The credit could potentially be pushed to $3,200 if you can incorporate the Residential Clean Energy Credit and the Solar Credit. However, there are some interesting requirements attached to this, so see the IRS FAQ.
Clean energy vehicle credits are $7,500. When all else fails, buy a new car. This year in addition to depreciation or lease payment deductions, there are new EV credits to consider.
These are just a few tax planning ideas for 2023 and perhaps could waterfall over to 2024 to provide additional tax benefits.
Amy Chorew is an active Realtor involved in investment properties and listing well-staged homes in Connecticut. Since 2008, Amy has been on the national speaking circuit teaching industry professionals about technology and sales strategies to help improve their business. Connect with her on LinkedIn and Instagram.
Maeda Palius has been a practicing CPA for 40 years. Her CPA firm focused on helping small and medium enterprises become more profitable and help the owners grow personal wealth. Connect with her on LinkedIn.
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Property Chomp's Take:
As we enter into a new year, it's important to not only plan for the future but also take a look back at the previous year to see how it may impact your taxes. Sisters Amy Chorew and Maeda Palius are here to offer some tips and insights to help you optimize your deductions on your 2023 taxes and plan ahead for next year's return.
While there haven't been any massive changes to the tax code in 2023, there are still some interesting considerations to keep in mind. It's important to note that these are just ideas and not tax advice. It's always best to consult with your tax preparer to ensure that these strategies are suitable for your specific situation.
If you had a low-income year in 2023, one option to consider is setting up a Roth IRA and converting IRA or 401k funds into the Roth IRA. This may incur some tax costs, but if you are at the lowest tax rates, funding enough to bring your income to the top of that rate can be beneficial. After the Roth IRA matures for five years and you reach the appropriate retirement age, you can withdraw the funds without any tax impact.
Another strategy is to defer income into 2024 and accelerate expenses into 2023. If you itemize, try to group medical expenses and charitable contributions into one year to maximize deductions. For those over the age of 70.5, utilizing a Qualified Charitable Distribution (QCD) from your IRA to make charitable contributions can help you avoid moving into a higher tax bracket.
When it comes to home office deductions, it's important to meet the requirements of using your home as an office and not having another office available for use. If you qualify, you can opt for the simplified method of calculating home office expenses, which allows you to use a rate of $5 per square foot up to 300 square feet, yielding a deduction of $1,500. However, if you use more than 300 square feet for a home office, the standard computation method may yield a better deduction.
Contributions to an IRA, Simple IRA, or self-employed 401K are also worth considering. These plans allow you to defer increasing amounts of contributions, reducing your tax liability while growing tax-free for retirement. The self-employed 401K, in particular, allows for annual deductions of up to $66,000, depending on your earned income.
For high-income earners who may not be able to contribute to a Roth IRA, utilizing a backdoor Roth can maximize contributions to a 401K or IRA. This involves making a non-deductible contribution to an IRA and converting it to a Roth without any tax impact. Additionally, setting up a mega backdoor Roth 401K can be beneficial if your plan allows for non-deductible IRA contributions.
In terms of tax credits, residential energy credits are back on the table for 2023. The Energy Efficient Home Improvement Credit offers a $1,200 annual tax credit, which can increase to $3,200 if you incorporate the Residential Clean Energy Credit and the Solar Credit. It's important to review the IRS FAQ for specific requirements and details.
Lastly, clean energy vehicle credits are $7,500, making it a great time to consider purchasing a new electric vehicle. In addition to depreciation or lease payment deductions, these credits can provide additional tax benefits.
These are just a few tax planning ideas for 2023, but they can also be applied to 2024 to provide further tax benefits. It's important to review your specific situation with a tax preparer to ensure that these strategies align with your goals and circumstances.
Amy Chorew is an active Realtor involved in investment properties and listing well-staged homes in Connecticut. Maeda Palius has been a practicing CPA for 40 years, focusing on helping small and medium enterprises become more profitable and helping owners grow personal wealth. Connect with them on LinkedIn for more insights and advice.
In conclusion, taking proactive actions and considering these tax planning ideas can help optimize deductions on your 2023 taxes and set you up for success in the future. It's important to consult with a tax preparer to ensure that these strategies are suitable for your specific situation and to take advantage of any qualifiers and specific due dates to implement them.
