Plan Your Retirement Savings Goals for 2023

Plan Your Retirement Savings Goals for 2023

A big jump in cost-of-living calculations means a big jump in how much you can contribute to retirement accounts in 2023! Now is the time to plan your retirement contributions to take full advantage of this tax benefit. Here are annual contribution limits for several of the more popular retirement plans:

Plan20232022Change
SIMPLE
IRA
Annual Contribution
50 or over catch-up
$15,500
Add $3,500
$14,000
Add $3,000
+ $1,500
+ $500
401(k), 403(b),
457 and
SARSEP
Annual Contribution
50 or over catch-up
$22,500
Add $7,500
$20,500
Add $6,500
+ $2,000
+ $1,000
Traditional
IRA
Annual Contribution
50 or over catch-up
$6,500
Add $1,000
$6,000
Add $1,000
+ $500
No Change
AGI Deduction Phaseouts:Single; Head of Household
Joint nonparticipating spouse
Joint participating spouse
Married Filing Separately
(any spouse participating)
73,000 – 83,000
218,000 – 228,000
116,000 – 136,000
0 – 10,000
68,000 – 78,000
204,000 – 214,000
109,000 – 129,000
0 – 10,000
+ $5,000
+ $14,000
+ $7,000
No Change
Roth
IRA
Annual Contribution
50 or over catch-up
$6,500
Add $1,000
$6,000
Add $1,000
+ $500
No Change
Contribution
Eligibility
Single; Head of Household
Married Filing Jointly
Married Filing Separately
138,000 – 153,000
218,000 – 228,000
0 – 10,000
129,000 – 144,000
204,000 – 206,000
0 – 10,000
+ $9,000
+ $14,000
No Change
Rollover to Roth EligibilityJoint, Single, or Head of Household
Married Filing Separately
No AGI Limit
Allowed / No AGI Limit
No AGI Limit
Allowed / No AGI Limit
No AGI Limit
Allowed / No AGI Limit

What you can do

  • Look for your retirement savings plan from the table and note the annual savings limit of the plan. If you are 50 years or older, add the catch-up amount to your potential savings total.
  • Then make adjustments to your employer-provided retirement savings plan as soon as possible in 2023 to adjust your contribution amount.
  • Double check to ensure you are taking full advantage of any employee matching contributions into your account.
  • Use this time to review and re-balance your investment choices as appropriate for your situation.
  • Set up new accounts for a spouse and/or dependents. Enable them to take advantage of the higher limits, too.
  • Consider IRAs. Many employees maintain employer-provided plans without realizing they could also establish a traditional or Roth IRA. Use this time to review your situation and see if these additional accounts might benefit you or someone else in your family.
  • Review contributions to other tax-advantaged plans, including flexible spending accounts (FSAs) and health savings accounts (HSAs).

The best way to take advantage of increases in annual contribution limits is to start early in the year. The sooner, the better.

It’s Tax Time! Tips to Get Organized

It’s Tax Time! Tips to Get Organized

The beginning of a new year brings the need to recap the previous one for Uncle Sam. Here are some tips and a checklist to help get you organized.

  • Look for your tax forms. Forms W-2, 1099, and 1098 will start hitting your inbox or mailbox in the next couple of weeks. If you have not already done so, review last year’s records and create a checklist of the forms to make sure you get them all.
  • Collect your tax documents using this checklist. Using a tax organizer or last year’s tax return, sort your tax records to match the items on your tax return. Here is a list of the more common tax records:
    • Informational tax forms (W-2s, 1099s, 1098s, 1095-A) that disclose wages, interest income, dividends and capital gain/loss activity
    • Other forms that disclose possible income (jury duty, unemployment, IRA distributions and similar items)
    • Business K-1 forms
    • Social Security statements
    • Mortgage interest statements
    • Tuition paid statements
    • Property tax statements
    • Mileage log(s) for business, moving, medical and charitable driving
    • Medical, dental and vision expenses
    • Business expenses
    • Records of any asset purchases and sales, including cryptocurrency
    • Health insurance records (including Medicare and Medicaid)
    • Charitable receipts and documentation
    • Bank and investment statements
    • Credit card statements
    • Records of any out of state purchases that may require use tax
    • Records of any estimated tax payments
    • Home sales (or refinance) records
    • Educational expenses (including student loan interest expense)
    • Casualty and theft loss documentation (federally declared disasters only)
    • Moving expenses (military only)

If you aren’t sure whether something is important for tax purposes, retain the documentation. It is better to save unnecessary documentation than to later wish you had the document to support your deduction.

  • Clean up your auto log. You should have the necessary logs to support your qualified business miles, moving miles, medical miles and charitable miles driven by you. Gather the logs and make a quick review to ensure they are up to date and totaled.
  • Coordinate your deductions. If you and someone else share a dependent, confirm you are both on the same page as to who will claim the dependent. This is true for single taxpayers, divorced taxpayers, taxpayers with elderly parents/grandparents, and parents with older children.

With proper organization, your tax filing experience can be timely and uneventful.

Shrink Your Tax Bill in 2023

Shrink Your Tax Bill in 2023

Here are several strategies to consider to shrink your tax bill in 2023.

Consider life events. Consider whether any of the following key events may take place in 2023, as they may have potential tax implications:

  • Purchasing or selling a home
  • Refinancing or adding a new mortgage
  • Getting married or divorced
  • Incurring large medical expenses
  • Changing jobs
  • Welcoming a baby

Manage your retirement. One of the best ways to reduce your taxable income is to use tax beneficial retirement programs. Now is a good time to review your retirement account funding. Here are the contribution limits for 2023:

  • 401(k): $22,500 ($30,000, Age 50+)
  • IRA: $6,500 ($7,500, Age 50+)
  • SIMPLE IRA: $15,500 ($19,000, Age 50+)
  • Defined Benefit Plan: $66,000

Look into credits. There are a variety of tax credits available to most taxpayers. Take a look at those you currently use and determine whether you qualify for them again next year. Here are some worth reviewing:

  • Child Tax Credit
  • Earned Income Tax Credit
  • Premium Tax Credit
  • Adoption Credit
  • Elderly and Disabled Credit
  • Educational Credits (Lifetime Learning Credit and American Opportunity Tax Credit)

Assess your income. Forecast how your 2023 income will compare to your 2022 income, then review your most recent tax return and find your effective tax rate by dividing your total tax by your gross income. Then apply that rate to your new income. This will give you a rough estimate of next year’s tax obligation.

To avoid getting stuck with an unexpected tax bill, consider scheduling several tax planning sessions throughout the year. Remember, some tax saving ideas may require funding on your part. It is best to identify them now so you can save the cash necessary to take advantage of them throughout 2023.

Tax Court Corner

Tax Court Corner

Here’s a roundup of several recent tax court cases and what they mean for you.

 

Thou Shalt Not Commingle Funds

(Vorreyer, TC Memo 2022-97, 9/21/22)

Don’t let sloppy record keeping prevent you from deducting legitimate business expenses. The Tax Court agreed with the IRS that business expenses must first be deducted on that business’s tax return before flowing to the owner’s tax return.

Facts: A married couple, the sole shareholders of an S corporation, operated a family farm in Illinois. In 2012 they paid the farm’s utility bills of $21,000 and property taxes of $109,000 from their personal funds, then deducted these payments on their individual Form 1040 tax return as business expenses.

Even though the utility and property tax bills were legitimate business expenses, the deduction was disallowed because the expenses should have first been deducted on the farm’s S corporation tax return, then flowed through to the shareholder’s individual tax return.

Tax Tip: To pay an expense on behalf of your business, first make a capital contribution to your business, then have your business pay the expense. Then include this expense on your business’s tax return.

 

Adding Tax Insult to Injury

(Dern TC Memo 2022-90, 8/30/22)

Payments received to settle a physical injury or illness lawsuit are generally considered non-taxable income. But you better be sure that the lawsuit you file is actually to compensate for a physical injury or illness, and not something else.

Facts: Thomas Dern, a sales representative for a paint products company in California, was hospitalized for acute gastrointestinal bleeding and a subsequent heart attack. When the company fired him because he could no longer do his job, he sued for wrongful termination. The parties eventually reached a settlement.

Dern argued in Tax Court that his illness led to his firing, and therefore the settlement should be classified as non-taxable income. The payment he received, however, was to settle a discrimination lawsuit and not a physical injury. The settlement therefore did not qualify to be non-taxable income.

Tax Tip: Pay attention to the tax consequences of settlement payments so you don’t get surprised with an unexpected tax bill.

 

You’re Stuck With the Standard Deduction

(Salter, TC Memo 2022-49, 4/5/22)

Facts: Shawn Salter, a resident of Arizona, requested and received a distribution of $37,000 from his retirement plan after being laid off from his job in 2013. Salter failed to file a tax return for 2013, so the IRS created a substitute tax return for him using the standard deduction of $6,500 for a single taxpayer. The IRS also assessed an early withdrawal penalty of 10% on the distribution.

Salter, arguing that the distribution was to pay for medical expenses which aren’t subject to the 10% early withdrawal penalty, eventually did file a 2013 tax return with $25,000 of itemized medical expenses. The Tax Court disallowed the $25,000 of itemized deductions, stating that once a substitute return is created by the IRS using the standard deduction, the taxpayer can no longer claim itemized deductions for that year. Tax Tip: Try to avoid a situation where the IRS files a substitute tax return on your behalf. Once this happens, you have no choice but to use the standard deduction for that tax year.

Maximize Your College Financial Aid With These FAFSA Tips

Maximize Your College Financial Aid With These FAFSA Tips

A brand new Free Application for Federal Student Aid (FAFSA) made its debut on October 1st, featuring 60% fewer questions and a host of other changes that aim to increase the likelihood that you can qualify for financial aid.

As you prepare to complete this year’s application, here are some tips to maximize your FAFSA eligibility for financial aid.

  • File the FAFSA early. More than a dozen states award financial aid on a first-come, first-serve basis. Students who file the FAFSA in October tend to get more than twice as much grant aid on average as students who file the FAFSA later. Even better, by completing the FAFSA early you can time your financial requests to colleges with their varied due dates.
  • Minimize income in the base year. 2021 is the base tax year when filling out the FAFSA for the 2023-2024 school year. If you’ve already filed your 2021 tax return, consider filing an amended Form 1040 if there were deductions you may have overlooked that could reduce your income. Otherwise, file this knowledge away to best position your income for future years.
  • Reduce the amount of reportable assets. While assets aren’t weighted as heavily as income on the FAFSA, they could still affect overall financial aid eligibility. To decrease the amount of reportable assets, consider using cash in your bank accounts to pay down unsecured debt such as credit cards and auto loans, or maximizing retirement plan contributions. Keep in mind that certain assets aren’t considered when determining financial aid eligibility. This includes the home you live in, the value of life insurance, and most retirement plans.
  • Use 529 plans wisely. 529 plan owners will impact how the funds are reported on the FAFSA. If the account owner is a grandparent or relative, the funds are not counted on the FAFSA until the money is used. So timing the use of these funds is important. And remember if the account owner is a parent or the student, the balance of 529 plans is considered an asset of the parent on the FAFSA.
  • Spend a student’s money first. If a student does have cash saved or other assets, consider withdrawing money from student assets first before touching parent assets, since student assets are assessed at a higher rate than parent assets.
  • Plan for the American Opportunity Tax Credit (AOTC). If your family is eligible for the AOTC, try spending up to $4,000 in tuition and textbook expenses using cash. The AOTC’s maximum tax credit of $4,000 will be worth more dollar-for-dollar rather than using a $4,000 tax-free distribution from a 529 plan.
Still Time to Reduce any Tax Surprises!

Still Time to Reduce any Tax Surprises!

Consider conducting a final tax planning review now to see if you can still take actions to minimize your taxes this year. Here are some ideas to get you started.

  • Review your income. Begin by determining how your income this year will compare to last year. Since tax rates are the same, this is a good initial indicator of your potential tax obligation. However, if your income is rising, more of your income could be subject to a higher tax rate. This higher income could also trigger phaseouts that will prevent you from taking advantage of certain deductions or tax credits formerly available to you.
  • Examine life changes. Review any key events over the past year that may have potential tax implications. Here are some common examples:
    • Purchasing or selling a home
    • Refinancing or adding a new mortgage
    • Getting married or divorced
    • Incurring large medical expenses
    • Changing jobs
    • Welcoming a baby
  • Identify what tax changes may impact you. Some of the major changes this year include the lowering of the child tax credit and the lowering of dependent care credit for working couples. This year also marks the first year in the last two with no pandemic related payments. If you think this could impact your situation it may make sense to conduct a tax planning review.
  • Manage your retirement. One of the best ways to reduce your taxable income is to use tax beneficial retirement programs. So now is a good time to review your retirement account funding options. If you are not taking full advantage of the accounts available to you, there is still time to make adjustments.
  • Look into credits. There are a variety of tax credits available to most taxpayers. Spend some time reviewing the most common ones to ensure your tax plan takes advantage of them. Here are some worth reviewing:
    • Child Tax Credit
    • Earned Income Tax Credit
    • Premium Tax Credit
    • Adoption Credit
    • Elderly and Disabled Credit
    • Educational Credits (Lifetime Learning Credit and American Opportunity Tax Credit)
  • Avoid surprises. Your goal right now is to try and avoid any unwanted surprises when you file your tax return. It’s also better to identify the need for a review now versus at the end of the year when time is running out. And remember, you are not required to be a tax expert. Use the tips here to determine if a review of your situation is warranted.
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