The countdown to the new year may be over, but you still have time to potentially lower your 2023 tax liability with these six tips from Maya Brill, senior wealth strategist with Regions Private Wealth Management.
Avoid an Underpayment Penalty – But Act Fast
If you underestimated your 2023 income and failed to adequately withhold or make quarterly payments, you could be subject to underpayment penalties. In general, to avoid underpayment penalties, you must pay at least 90 percent of the total you owe for the current tax year or 100 percent (110 percent if Adjusted Gross Income is greater than $150,000 for married filing joint, and $75,000 for single) of the taxes shown on last year’s return.
“Fortunately, it is not too late to mitigate and/or avoid an underpayment penalty,” said Brill. “You have until Jan. 16, 2024, to make your final estimated payment.”
Brill suggests for 2024 planning and beyond, you may want to consider adjusting the withholding amount on your W-4 and/or apply any refunds to the following year to address any deficiencies.
Readdress IRA Contributions for 2023
In need of a last-minute deduction?
Did you forget to contribute to or fully fund your retirement accounts in 2023?
“Not to worry,” said Brill. “Contributions to an IRA can be made until April 15, 2024, and still count for 2023.”
She noted that for 2023, you can contribute up to $6,500 to your IRA with an additional “catch-up” contribution of $1,000 for people aged 50 and over.
Maximizing Your Flexible Spending Accounts (FSAs)
If you have an FSA but did not spend all the funds in your account by the end of 2023, all may not be lost. Brill advises to check with your employer to see if they have adopted the grace period permitted by the IRS allowing employees to spend 2023 set-aside money as late as March 15, 2024.
2023 Trust Distributions – The “65-Day Rule”
Trusts pay the highest federal income tax rate of 37% at a much lower threshold than individuals ($14,450 of income versus $693,750 for married filing joint).
“Many beneficiaries have a lower tax rate than a trust,” said Brill. “Therefore, income that is distributed to those beneficiaries at a lower rate will be taxed at that lower rate.”
Trustees have up to 65 days into the following year to make a distribution that will count toward the previous year. Brill noted that leveraging this opportunity, if applicable, is a great way to mitigate taxation.
Electing Into a Passthrough Entity (“PTE”) Tax
With the passing of the Tax Cuts and Jobs Act in 2017, state and local tax deductions for individuals have been capped at $10,000.
“To mitigate the effects of this on their residents, many states have enacted new tax laws allowing qualified passthrough entities (generally S corporations, partnerships, and LLCs) to elect to pay state taxes at the entity level rather than as a passthrough at the individual’s level,” Brill said. “The entity is then able to deduct the entity level state taxes as a business expense and reduce the partner’s share on their K-1 for federal tax purposes.”
Many states also provide the owners of PTEs a state tax credit for their share of the PTE tax or may exclude their share of the PTE’s income in computing their state income tax. States vary as to when the election must be made, but most allow for it to be on or before March 15, 2024, for calendar year filers. Brill suggests checking with your tax preparer for state-specific rules and to see if you could benefit from this election.
Converting Into Corporate Entities
“The new year is not just about putting together a plan for your personal life,” said Brill. “It is also about planning for your business.”
The choice of entity is something business owners should constantly be reviewing, she noted. If during your review, you realize it may be time to convert to a corporate entity or switch between corporate entities filing the appropriate paperwork prior to March 15 allows the election to become effective as of the 1st of the year. Filing after that date causes the election to be effective as of the first day of the following tax year.
Need additional tax and estate planning resources? Regions Wealth Insights has you covered.
This information is general in nature, is provided for general marketing and educational purposes only, and should not be interpreted as accounting, financial planning, investment, legal or tax advice or relied on for any decisions you may make. Regions encourages you to consult a professional for advice applicable to our specific situation and consult irs.gov for current tax rules. Although based upon information from sources believed to be reliable and accurate, Regions makes no representation or warranties with respect to the information contained herein. Opinions of authors and contributors are their own and may not reflect the position of Regions, and Regions neither endorses nor guarantees any such advice, opinions, products or services. Regions neither endorses nor guarantees any websites or companies referenced this publication that are not owned by Regions.