Taxes 2023: Deductions You May Not Know About (But Should Be Taking)
It’s a safe bet that no one wants to pay more in taxes than they have to. But often, what we don’t know can hurt us come tax time. And with the speed at which tax laws can change, it’s important to understand specific money moves we can use now – and in the future – to help maximize deductions and other tax savings.
Combining certain tax strategies with routine planning and other opportunities such as charitable gifting can help to maximize deductions, especially in a high-tax year, says Alvina Lo, Wilmington Trust’s Chief Wealth Strategist.
Here are some tax moves to keep in mind for every year, not just 2023:
Contribute to Tax-Advantaged Accounts
Contributions made to 401(k), 403(b), and Health Savings Accounts can reduce your current year’s taxable income by thousands annually. When it comes to the retirement accounts, those who are age 50 and older can contribute even more to 401(k)s and 403(b)s as a way to catch up for not saving more in the past. Also, new rules approved by Congress in late 2022 will expand savings opportunities for those age 60 to 64 in the future. If you don’t already contribute to a tax-advantaged retirement account, or set aside enough to earn an employer match, make this the year you start saving more for your future self.
If you qualify for a Health Savings Account and don’t have one, it’s worthwhile to investigate the many benefits that often go under-used with these plans. (You can open one as long as you have a qualifying high-deductible health insurance policy.) With an HSA, your contributions go into the account tax free, so anything that you put into your HSA reduces your taxable income for the year. The money also rolls over each year, meaning you don’t lose it if you don’t spend it. Once it’s invested, the money in an HSA also grows tax free, and when you take money out — as long as it is used to pay for medical expenses — you won’t ever have to pay taxes on it. Plus, whenever you use money from the HSA for day-to-day medical expenses, you’ll end up saving about 25% off those expenses thanks to all the tax advantages of the account.
If you end up not spending all of the funds in your HSA for healthcare expenses during your working years, the account can also serve as a supplemental retirement account. At age 65, you can spend HSA funds on non-medical expenses without penalty. Those withdrawals, though, will be treated similar to 401(k) withdrawals and taxed at your current income tax rate.
529 College Savings Plans
Investing in a 529 College Saving Plan is a good way for parents and grandparents (and other relatives or family members, hint!) to set aside money that grows tax-free for the education of younger generations. While these accounts are designed for college expenses, the funds can also be used for children in grades K through 12, for tuition and fees of up to $10,000 per year. (The money can also be used to pay for books and supplies, computers and internet, and room and board if the student is enrolled at least half of the school year.)
Worried about saving too much in a 529? Don’t be. After graduation, 529 assets can be used to repay up to $10,000 in student loans for the benefit of the account holder, or any of their siblings. You can also change the beneficiary to the parent and repay up to $10,000 of PLUS loans, or to pay for educational expenses for siblings and other relatives. And, thanks to new federal tax law changes in 2022, up to $35,000 in leftover 529 assets can be rolled into a Roth IRA for retirement.
If you’re ready to learn more about your saving and investing style — and where you might be able to improve your financial picture so that you can reach your bigger goals quicker — it’s time to learn your MoneyType and figure out your strengths and weaknesses. (Because if there’s one thing better than finding out how you can improve your financial life, it’s taking the steps to actually make that positive change happen!)
Check into Tax Credits
The American Opportunity Tax Credit is available to eligible students for their first four years of higher education. It’s worth a maximum $2,500 per student per year – that’s 100% of the first $2,000 in qualified education expenses and another 25% of the next $2,000 in qualified education expenses. And it’s partially refundable, meaning that if the credit brings your tax bill in any particular year down to zero, you can receive up to 40% (or $1,000) as a tax refund. There are income limits: Your modified adjusted gross income must be $80,000 or less (for singles), and $160,000 or less (for joint filers), to receive the entire amount. There’s a phase out and if you make more than $90,000 (singles), $180,000 (joint) you’re not eligible.
Also, look into the Lifetime Learning Credit. It’s worth up to 20% of the first $10,000 of qualified educational expenses — or $2,000 per year — per family.
Consider a Home Office Tax Deduction
A few years ago, the eligibility rules for claiming a home office deduction were relaxed to allow more self-employed individuals to claim the tax break. Despite the IRS change, many people are still hesitant to claim the deduction because of fears of triggering an audit. The rules are pretty straightforward: If you have no fixed location for your business, you can claim a home office deduction if you use the space for administrative or management activities, even if you don’t meet clients there. So while you can’t claim your kitchen if you use your dining table as a desk, you can use a home office if the space is used exclusively for business. This also applies to people who are employed full-time but have a small business (hello, gig economy) on the side that generates income.
Those who qualify can deduct portions of rent or mortgage interest, utilities and insurance, based on the part of your home used as a home office. Or, you can take what’s known as the simplified option that’s worth $5 per square foot of a home office, up to 300 square feet, for a maximum deduction of $1,500. (Note that employees who work remotely from home cannot take the home office deduction, this rule is meant for business owners.)
No matter which tax bracket you fall in, it’s important to have a plan in place to maximize your savings. If you feel like you could use some extra help, consider seeking the assistance of a tax professional and/or certified financial planner.*
*CUofCO does not provide tax, legal, or investment advice. This message does not represent official tax or legal advice, and you should always consult your tax or legal advisor with questions regarding tax issues.