Consider using tax-advantaged accounts to help lower your tax bill.
Even in the wake of complex tax provisions, a key to lowering your tax bill is really quite simple: report lower taxable income.
Since few of us actually want to earn less, the next option to consider is to stash as much income as you can into tax-advantaged accounts. If you haven’t contributed the maximum amount to a qualified retirement plan at work, consider adding money while you can.
- Contribution limits for 401(k) and other retirement plans for the 2023 tax year are $22,500 or $30,000 if you’re 50 or older (2022: $20,500 and $27,000).
- Consider making additional salary deferrals if you are eligible to participate in an employer supplemental employee retirement plan (SERP). This will enable you to further maximize contributions to reduce your taxable income now and defer more compensation into later years when your tax rate may be lower.
- You can accumulate funds on a tax-deferred basis to pay for healthcare expenses through a health savings account (HSA) or flexible savings account (FSA). Your workplace may offer one, both or neither of these options, so check with your employer. HSA contribution maximums in 2023 are $3,850 for self-only and $7,750 for families, with an additional $1,000 catch-up contribution allowed for individuals age 55 or older (2022: $3,650 and $7,300). The limit for individual health FSA contributions is $3,050 (note that dependent care FSAs have a higher cap of $5,000); employer contributions do not count toward this maximum.
- Once you maximize employer retirement plans, consider contributing to an IRA (still a $6,500/year limit, or $7,500 if you’re 50 or over). Traditional IRA contributions are tax deductible if your modified adjusted gross income is under $83,000 for individuals (phase-outs begin at $73,000) or $136,000 for joint filers (phase-outs begin at $116,000). You must establish a new IRA account by April 15, 2024, for 2023 contributions, and you have until then to make 2023 contributions to an IRA.
- If you work for yourself, consider contributing to a solo 401(k) retirement plan, SEP IRA or SIMPLE plan.
Your financial advisor can help develop a retirement account contribution strategy that’s tailored to your unique situation.
Please note, changes in tax laws may occur at any time and could have a substantial impact upon each person’s situation. While we are familiar with the tax provisions of the issues presented herein, Raymond James financial advisors do not render advice on tax or legal matters. You should discuss any tax or legal matters with the appropriate professional.
Contributions to a traditional IRA may be tax-deductible depending on the taxpayer’s income, tax-filing status and other factors. Withdrawal of pre-tax contributions and/or earnings will be subject to ordinary income tax and, if taken prior to age 59 1/2, may be subject to a 10% federal tax penalty.