For many filers, the tax filing season of 2022 is now a distant memory. However, if you are the type of person who frequently contemplates taxes, you may already be dreading the filing season of 2023. This is especially true if you have a history of owing the IRS money.
Next year, though, you will not be forced to submit a hefty cheque. If you take these actions sooner rather than later, you will be in a position to pay less in taxes to the IRS in 2023 — without breaking the law in any way.
1. Max Out Your IRA Contributions
The Individual Retirement Account (IRA) offers tax-advantaged savings for retirement. There are now two primary types of IRAs available: regular and Roth.
Contributions to a Roth IRA are not immediately tax-deductible. A traditional IRA will, though. Thus, if you contribute the maximum to a traditional IRA this year, you will hide a portion of your earnings from taxes.
If you are under the age of 50, you can currently contribute up to $6,000 annually to a regular or Roth IRA. This maximum climbs to $7,000 if you are 50 or older.
If you are 45 and contribute the maximum for this year, the IRS will not be able to tax your earnings of $6,000 this year. The result? A decrease in tax liability.
2. Do Not Sell Investments in a Brokerage Account for at Least a Year and a Day
When you sell investments in your IRA for a profit, the proceeds are not taxed immediately. Rather, with a traditional IRA, profits are tax-deferred, and you do not have to pay taxes on them until you begin withdrawing funds from the account. Investment gains are tax-free with a Roth IRA.
However, if you sell investments for a profit in a standard brokerage account, you will be required to pay taxes on those gains sooner rather than later. In fact, if you lock in gains in your brokerage account this year, you will owe more when you file your 2022 tax return 2023.
Therefore, it is essential to hold your investments for a minimum of one year and one day before selling them for a profit.
Taking this route will result in long-term capital gains, which are taxed at a much lower rate than short-term gains. Short-term capital gains about investments you hold for less than a year before selling.
3. Buy a house
Obviously, you cannot become a homeowner with a snap of your fingers. However, if you’ve been saving for a home purchase and can accelerate your search, you may receive a tax benefit.
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As a homeowner, you are eligible for a variety of tax breaks, the largest of which is the ability to deduct mortgage interest (to be clear, this does not imply that your entire mortgage payment is tax-deductible).
You can also deduct the property taxes you pay, though depending on how much they are and how your local income taxes are structured, you may only be able to deduct a portion of your property tax bill (and some homeowners cannot benefit at all).
Nobody enjoys paying more in taxes than is required. If you can make these changes quickly, you will be in a much better mood when it comes time to file your 2022 tax return next year.
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