The Best Ways to Reduce Your Tax Liability in 2023
written by Mark Badkar
reviewed by Robin T Young
Are you looking for innovative ways to legally reduce your tax liability? Here’s a complete guide on the most effective strategies to use in 2023.
The average taxpayer will receive a $1,997 tax refund from the IRS in 2023. While that might make those getting it happy, it means they overpaid that amount in taxes during the previous year.
Also worth noting is that this was a 14% drop in tax return amount from the previous year.
Going into the 2023 tax season, the IRS warned that taxpayers should expect smaller tax returns from the previous year. It would be more challenging to reduce your tax liability.
This is partly due to reduced tax rebates from previous economic relief packages. The tax rules for charitable donations have also been adjusted over the last year, making using those for tax relief harder.
So, how can you reduce your tax liability during this tax season? Read on for some tax strategies to lower your tax liability in the future.
Max Out Contributions to 401k and Traditional IRA
One of the most accessible avenues to reduce your tax liability is by contributing to work-sponsored retirement accounts like a 401K or a traditional IRA.
You actually get a double benefit when you do this. First, the money you contribute isn’t taxed until you withdraw it in retirement. Second, you reduce your current taxable income by a percentage of whatever you contribute based on your tax bracket’s taxable percentage.
If you are already putting money into a retirement account, ensure you’re maxing out the amount allowed. In 2022, that amount increased to $20,500; in 2023, it increased to $22,500.
Start an HSA
Another method to reduce your personal tax responsibility is to start and contribute to a health savings account (HSA). Many companies offer the opportunity to join an HSA to help cover the cost of out-of-pocket medical expenses.
Depending on your current tax situation, there are two ways to contribute to an HSA. You can contribute before taxes, and the money you put in lowers your taxable income.
You can also contribute to your HSA after taxes and write off what you contribute on your taxes.
The money you put into an HSA isn’t taxed as long as it’s used for qualifying health-related expenses like deductibles and prescription drugs.
Take Advantage of Tax Credits
There are a variety of tax credits offered through the IRS that can help to lower your tax burden. When you apply for a tax credit, it goes towards the amount of your taxable income.
So, if you owe $1,000 in taxes and your tax credit is $1,000, your tax liability becomes zero.
Some available tax credits can even be refunded if they go beyond your taxable income.
Talk to your tax professional or look to the IRS website for qualifying tax credits that might fit your tax situation.
Take Advantage of Long-Term Capital Gains
Many taxpayers use investments to not only save on taxes but also to grow their wealth. One advantage of inventing is the long-term savings you get from capital gains.
You can invest in stocks, mutual funds, bonds, and real estate to maximize long-term capital gains. So, before you sell an asset, consider how long you’ve held it.
If you sell within the year, there are no tax advantages on your profits. But if you hold the asset, you can receive a tax benefit of up to 15% or 20%, depending on your tax bracket.
Start a Business and Deduct Business Expenses
You might be surprised that you could start a business to save some tax money. Of course, one benefit of a small side business is the additional income it provides.
There are some business tax ramifications that you want to discuss with a tax professional. However, you can write off many business expenses from your personal tax filing.
If your small business operates from your home, you can write a percentage of home expenses because you have a home office used for your business.
If you use your personal cell phone, home wifi, or vehicle for your business, you can even use a portion of these expenses as a business deduction.
Deduct Student Loan Interest
43.5 million Americans have student loan debt. $37,574 is the average amount of federal student loan debt carried by Americans. There are several ways to qualify for a deduction if you have federal student loans.
Some of these include:
- You have a modified AGI of less than $70,000 or $145,000 for joint filers
- Loan balances were used for qualified expenses like room, board, tuition, books, or other school fees
- You have a Parent PLUS loan on behalf of your child
- Not a dependent on a parent’s tax return
You can write off up to $2,500 for a tax deduction for higher education interest and expenses.
Sell Off Poorly Performing Stocks
If part of your investments includes buying stocks, you might want to look at their overall performance. It’s unusual for a tax advisor to suggest selling stocks when they might increase your tax burden.
However, you might decide to use a tax-loss harvesting strategy if you have a poorly performing stock in your portfolio. It might benefit you to sell the stock at a loss and use the money to reinvest.
The losses you incurred from the stock sale can become a deduction on your current taxes.
Hire a Professional Tax Expert
The US tax system is complex and rapidly changing from year to year. You don’t want to miss out on any opportunity to save money on your taxes.
While hiring a professional tax expert might cost you some money, what it costs will not even come close to what you can save. Often there are tax credits and deductions you miss out on simply because it’s so hard to keep up with all the possible ways to save.
Reduce Your Tax Liability Using Smart Tax Planning
You want to look forward to that tax return. Use these ways to reduce your tax liability this tax season.
If you have tax questions or want more ways you might save on your tax liability, contact us today.