Fewer things are more reliable than Tax Day, even if the deadline has shifted around a bit in recent years. This year, it’s April 18th for most taxpayers, and recent legislation changes include substantial increases to standard deduction amounts and modifications to itemized deductions. Also, if you’ve reached age 72 in 2022 (age 73 starting in 2023), you generally must start taking withdrawals from your qualified retirement plan. Your Required Minimum Distribution (RMD) will be reported as taxable income except for any part that was taxed before (your basis) or that can be received tax-free (such as qualified distributions from designated Roth accounts) so be sure to include that information on your return, if applicable.
IRAs and Retirement Plans. Tax-advantaged retirement savings vehicles (such as your employer’s 401(k) and/or a traditional IRA) can help reduce your taxable income because contributions are made on a pre-tax basis. Those traditional IRA contributions may be fully or partially deductible, depending on your filing status and income, and your deduction may be limited if your income exceeds certain levels and if you (or your spouse) are covered by a retirement plan at work. While your contributions to your employer 401(k) plan cap out at the end of each tax year, you generally have until the April filing deadline to maximize contributions to an IRA. For 2023, the contribution limit increases to $6,500 for the year. Individuals aged 50 and older can add an additional $1,000 for a ‘catch-up’ contribution of $7,500.
Health Savings Account (HSA). You can claim a tax deduction for contributions that you (or someone other than your employer) make to your HSA, even if you don’t itemize your deductions. Contributions to your HSA made by your employer (including contributions made through a cafeteria plan) may be excluded from your gross income, and the interest or other earnings on the assets in the account are tax-free. Distributions may also be tax-free if you pay qualified medical expenses. The higher HSA contribution limits for 2023 are $3,850 for individuals and $7,750 for families, plus an extra $1,000 catch-up contribution for those aged 55 or older. Contributions for the 2022 tax year can be made up until April 18, 2023.
Timing is important. With the higher standard deduction amount for 2023, many folks who used to itemize are finding that it doesn’t make sense unless the total is more than the standard deduction amount. Consider grouping your “once a year” deductions into “twice the amount every other year” to accelerate your deduction totals and improve your tax liability. Similarly, you may want to defer income sources to future years if your tax bracket might be lower then.
If you DO itemize, here are two deductions that can impact your totals but are often overlooked: