Yes, April 15 is the traditional due date for filing your federal income tax return. But if this completely slipped your mind, and you haven’t filed your taxes yet, you’ll be relieved to know that this year’s tax deadline was pushed back to April 18.
So, don’t freak out if you haven’t started your 1040 yet. You still have a few more days to file your return for the 2022 tax year…or to request a filing extension to Oct. 16 (although you still must pay any tax you expect to owe by April 18 if you get an extension).
But the topic of today’s The Weekend Tea isn’t this year’s tax return. Instead, we’d like to show you how to get a head start on next year’s tax return.
The Tea
At this point, we estimate that more than 120 million Americans have already filed their 2022 tax return. That’s around 70% of all the federal income tax returns expected to be filed this year.
Since the majority of people have already put their 2022 tax return in the rear-view mirror, it’s not worth bothering everyone else with last-minute tax tips for procrastinators. But it is a good time to look ahead and offer a few pointers for anyone who wants to get a jump on their next tax return.
YATI Tip: If you still need to file your return, take a look at our Tax Preparation Checklist.
For most people, your tax return for the 2023 tax year won’t be due until April 15, 2024. That gives you plenty of time to plan ahead, which is what wise taxpayers do each year. As they say, proper planning prevents poor performance—and it’s just as applicable to taxes as it is to other aspects of life.
The Take
To that end, here are five things you can do before the end of the year to cut your next tax bill, avoid IRS penalties, and even save for the future.
1. Check Your Withholding
The U.S. tax system operates on a “pay as you go” basis. That means you must pay taxes on income more or less as you receive it. For employees, this requirement is satisfied when your employer withholds income taxes from your paycheck and sends it to the IRS on your behalf.
The goal is to have your tax liability and withholding for the year to be as close to one another as possible. That way, you won’t have to send the IRS a big payment when you file your tax return or end up with an oversized tax refund. (Remember, if you get a large refund, you essentially gave Uncle Sam an interest-free loan.)
You can also be hit with penalties and interest if you don’t have enough taxes withheld during the year, so it’s important to get this right.
So, what should you do now? Use the IRS’s Tax Withholding Estimator to see if you ought to adjust your paycheck withholding—especially if you experience a major lifestyle change (e.g., mariage, divorce, new baby, home purchase, etc.) or significant change in income in 2023. If adjustments are needed to bring your withholding closer to your expected tax liability, fill out a new Form W-4 and give it to your employer. The IRS tool will even help you with a new form.
You can also have taxes withheld from unemployment compensation, retirement plan distributions, and taxable Social Security benefits. Consider tweaking the withholding from these forms of income if needed, too.
2. Make Estimated Tax Payments
If you’re self-employed or have significant amounts of other income not subject to withholding (e.g., interest, dividends, capital gains, rental income, etc.), you might have to make estimated tax payments to satisfy the “pay as you go” requirement.
The same underpayment penalties for the failure to withhold enough taxes from your paycheck can be levied for the failure to pay enough estimated taxes. So, don’t take the estimated tax payment rules lightly if they apply to you.
Use Form 1040-ES and the accompanying instructions to determine if you need to make estimated tax payments for 2023 and, if so, how much to pay. If estimated tax payments are required, your first payment is likely due on April 18—so you need to act soon!
If you have a “regular” job, you can bypass estimated tax payments by having more taxes withheld from your paycheck to cover the income subject to the estimated tax rules. Use the IRS’s online withholding estimation tool to figure out how much additional tax to have withheld from your wages.
3. Save For Retirement, Medical Expenses or College
Saving for future expenses is always a good idea. But when you can also cut your next tax bill at the same time, squirreling away funds for use down the road is a no-brainer.
There are a number of tax-advantaged accounts you can put your money in. With these accounts, you can delay or even avoid taxes on earnings when you withdraw funds later in life. However, in some cases, you can also claim a tax deduction, exemption, or credit for contributions you make right now into these accounts.
For example, if you’re saving for retirement, you might be able to deduct up to $6,500 in contributions to a traditional IRA made in 2023 on the tax return you’ll file next year (up to $7,500 if you’re at least 50 years old). For 2023, up to $22,500 in contributions to a traditional 401(k) plan or similar employer-sponsored retirement account can also be excluded from your taxable income (up to $30,000 for workers age 50 or older). On top of these tax breaks, low- and middle-income taxpayers who put money in a retirement savings account might also qualify for the Saver’s Credit, which can cut your tax bill by up to $1,000 (up to $2,000 for joint filers).
A tax deduction is also available for contributions to a health savings account (HSA). For 2023, contributions to an HSA are limited to $3,850 for self-only coverage and $7,750 for family coverage. If you have an Archer medical savings account (MSA), you might be able to deduct contributions to that account as well.
YATI Tip: Check out our list of the best HSA providers.
If you’re saving for college or other educational expenses with a 529 plan, you might snag a tax break for 2023 contributions … but not on your federal tax return. While there are no immediate tax breaks under federal law for stuffing money in a 529 plan, you might get a state tax deduction or credit for doing so. Check with the state tax agency where you live to see if there are any tax breaks for 529 plan contributions in your state.
4. Sell Off Depreciated Stock
If a few of your investments in the stock market are tanking, consider selling some of your depreciated shares this year to generate a loss. Why? Because those losses can be used to offset gains from the sale of profitable investments, which will lower your capital gains tax.
Plus, if you still have losses left over after offsetting gains, you can deduct up to $3,000 of the remaining losses from your “ordinary” income, such as wages, tips, interest, retirement plan distributions, and the like. Anything over the $3,000 limit is carried forward and applied against gains or ordinary income in future years.
This tactic—known as tax-loss harvesting—doesn’t have to be done right away. You can track your investments through the year and start selling losers in November or December.
YATI Tip: Want to give stock as a gift instead of selling it? See how to save on taxes.
But watch out if you want to buy back some of the stock you sell. Under the “wash sale rule,” you can’t offset gains or deduct losses from ordinary income if you buy the same or substantially identical stock 30 days before or after the sale. (Pro tip: This rule doesn’t currently apply to cryptocurrencies, allowing you to sell and buy back within the 30 day period.)
5. Donate to Charity
If you itemize deductions instead of claiming the standard deduction on your 2023 tax return, you can deduct donations to charity made this year. There are some limitations (e.g., charitable deductions are generally limited to 60% of your adjusted gross income), but in most cases you can deduct the full fair market value of gifts to a church, school, or other qualified charitable organization.
While you don’t have to rush out and donate right away, planning the rest of your 2023 charitable giving now can pay off big time at tax time. For instance, if you don’t normally donate enough each year to justify itemizing, but you expect itemized deductions to be close to the standard deduction for the year, you can consolidate two or more years worth of giving into one year. With this strategy—known as “bunching”—you can at least deduct those gifts in one year, instead of missing out on the deduction for all years.
You can also set up a donor-advised fund if you don’t think your itemized deductions will quite surpass your standard deduction for the year. You then can make a single contribution to the fund in one year, but have the fund distribute the money to selected charities over the course of several years. As with bunching, at least you get to claim a charitable deduction for the one year that the single contribution to the fund is made.
If you’re at least 70½ years old, you can also make a qualified charitable distribution (QCD) from a traditional IRA and have that money go directly to charity. You can’t claim an itemized deduction for a QCD, but the amount donated isn’t considered taxable income (like other distributions from traditional IRAs). In addition, QCDs count toward your required minimum distribution for the year, so you can keep more money in your tax-advantaged account for a longer period of time.
One final note: Obviously, additional tax saving opportunities might be available based on your unique financial circumstances. So, as a “bonus” tip, we recommend consulting with a tax professional before the end of the year to see what other planning options are available to you—particularly if your finances are complex. And the sooner you do this the better.
Rocky, Riley & Kyle
Young & The Invested (Soon to be WealthUp)
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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
