5 Tax and Investment Changes That Could Help Your Finances in 2023
Introduction
After a year of high inflation, volatile stock markets, and rising interest rates, it is understandable why many feel uncertain about 2023.
The IRS has issued updates in response to rising costs, which have a broad impact on American finances, including retirement savings and taxes. And recent legislation may afford the new year with additional options.
According to experts, the following are the top five financial opportunities to investigate in 2023, along with how each may affect your finances.
Increase your 401(k) contributions to the max
In 2023, you can contribute a lot more to your retirement account. The maximum salary deferral for 401(k) contributions is $22,500, up from $20,500 in 2022.
If you are 50 or older, the catch-up provision permits you to contribute an additional $7,500 to your retirement, an increase of $1,000 from 2022. (That's a total of $3,000 in additional retirement savings and lower income taxes.) If you have been leaving your contribution at work unattended, now is the time to make a change.
Extra hint for 2022: There are two reasons why you may want to implement the raise immediately rather than waiting until the first paycheck of the year.
First, if you received a raise this year but did not increase your contributions, you may have forgotten.
Second, if you anticipate a year-end bonus, you can contribute more to your 401(k). Even a single paycheck this year can increase your contribution and tax savings.
Seize available deductions
There is some good news for taxpayers this year. The IRS has broadened tax brackets, which could result in lower income taxes for many, as well as increase the standard deduction and several savings incentives.
Individuals may have a greater amount of taxable income before being pushed into a higher tax bracket due to inflation-adjusted tax brackets. In addition, the standard deduction for married couples will rise to $27,700, an increase of $1,800. The increase for single filers is $900 to $13,850.
Consider your itemized deduction options for this year.
State and local taxes
Medical and dental expenses
Home mortgage interest
Charitable contributions
The deductions for theft and casualty losses resulting from a federally declared disaster were the most significant.
If you believe these deductions will exceed the standard deduction, you may want to consider grouping enough deductions into 2023 to receive a larger deduction by itemizing.
Donors who itemize their taxes may also deduct the fair market value of appreciated assets held for more than a year to a qualified public charity without paying capital gains tax.
Generally, the contribution is subject to a 30% adjusted gross income limitation. Any excess tax deduction can be carried forward for up to five years.
Put your savings to work.
If you have been able to accumulate additional savings in recent years, you may wish to put those funds to work through tax-efficient investing.
There are opportunities to grow your money in every market. The stock market may be more difficult this year. However, rising rates have created opportunities in individual bonds and certificates of deposit (CDs).
The location of these assets can also help you retain a larger portion of your earnings after taxes. Under your portfolio's asset allocation, holding investment products that generate taxable interest income, such as bonds and CDs, in tax-deferred accounts, such as IRAs, can help minimize taxes.
On the other hand, stocks whose long-term capital gains are taxed at a lower rate may be better held in taxable accounts.
For the 2022 tax year, there are numerous strategies to consider if you have funds to donate. You cannot claim a charitable contribution deduction while also claiming the standard deduction.
However, if you itemize, you can typically deduct a portion of your contribution. You could create a plan for 2022 to consolidate your charitable contributions into a single year to maximize your potential tax deduction.
Higher threshold for 0% long-term capital gains
According to experts, if you plan to sell investments from a taxable portfolio in 2023, you are less likely to incur long-term capital gains taxes.
The IRS also increased the income thresholds for the 0%, 15%, and 20% long-term capital gains tax brackets for 2023, which apply to profitable assets held for more than a year. These adjustments were based on inflation.
In 2023, with increased standard deductions and income thresholds for long-term capital gains, you are more likely to fall into the 0% tax bracket, according to Lucas.
For 2023, single filers with a taxable income of $44,625 or less and married couples filing jointly with a taxable income of $89,250 or less may qualify for the 0% tax rate.
Tax-loss harvesting
You may also want to consider year-round tax-loss harvesting for non-retirement accounts. The accounts in which you use realized losses to offset realized gains and up to $3,000 of ordinary income, depending on your filing status.
If you have investments that are priced below their cost basis and another investment (but not a substantially identical security), you could use it to replace the sold asset without materially altering your investment strategy. Consult a tax professional about your situation, and be mindful of the wash-sale rule.
As cryptocurrencies are not regulated as securities, wash-sale rules do not currently apply to cryptocurrencies. This means that you can sell coins whose value has decreased and immediately purchase them back at the same price, realizing a loss while still holding the asset.
Consult with a tax professional to stay abreast of changes, as pending legislation concerning cryptocurrency regulations may eliminate this loophole.
Higher-income limit for Roth IRA contributions
A Roth conversion involves transferring funds from a traditional IRA to a Roth IRA, followed by the payment of taxes on the amount converted.
After that, the money grows tax-free and is not subject to a required minimum distribution for the life of the original owner, typically after the 5-year aging period has passed. (A husband or wife who is the sole beneficiary of a deceased spouse's Roth IRA and rolls it over into their own Roth IRA is not required to take an RMD from the account.)
Now may be an ideal time to think about a Roth conversion; many investments have declined this year, allowing you to convert more shares for the same total amount and potential tax liability.
Also, tax rates are expected to increase in 2026, so if you wait until 2026 to convert your traditional IRA, you may end up paying higher rates.
Conclusion
Tax planning is not a one-time activity. To reduce taxes, it is prudent to plan throughout the year. Need help?
Contact one of our tax advisors and financial professional who can assist you in developing a tax-smart investment strategy.