9 Ways to Reduce Your Taxable Income in 2023

Rocky Mengle was a Senior Tax Editor for Kiplinger from October 2018 to January 2023 with more than 20 years of experience covering federal and state tax developments. Before coming to Kiplinger, Rocky worked for Wolters Kluwer Tax & Accounting, and Kleinrock Publishing, where he provided breaking news and guidance for CPAs, tax attorneys, and other tax professionals. He has also been quoted as an expert by USA Today, Forbes, U.S. News & World Report, Reuters, Accounting Today, and other media outlets. Rocky holds a law degree from the University of Connecticut and a B.A. The end of the year is a great time to start thinking about next year’s tax bill. Here are some strategies on how to reduce what you will owe Uncle Sam.

At the end of the day, not all of us can wrap our heads around the complexities of our tax system. Working with an accountant or tax preparer can help you find all of the possible ways for you to reduce your taxable income. The IRS sometimes uses what is known as the “step transaction” doctrine to argue that the substance of a particular transaction https://turbo-tax.org/5-ways-to-reduce-your-taxes-for-next-year/ is different from its form. When it relies on this doctrine, the IRS will treat a multi-stage transaction as a single, unified transaction. It will not break up a single transaction into two or more steps for income tax purposes. So, the intermediate steps in an integrated transaction will not be assigned separate tax consequences.

How to Get Your Tax Refund Faster

Of course, you should check with a tax professional before taking action in order to ensure that you haven’t overlooked critical factors. A dollar’s worth of tax credit reduces your tax bill by a dollar. However, a dollar’s worth of deduction lowers your income by the percentage amount of your marginal tax bracket. So, a dollar’s worth of deduction is worth only 35 cents if you’re in the 35 percent bracket; it’s value drops to 25 cents if you’re in the 25 percent bracket. Another deduction small business owners should be aware of is the Qualified Business Income (QBI) deduction. The QBI deduction allows the owners of pass through entities (sole proprietorships, S corporations, LLCs, partnerships) to claim a tax a deduction worth up to 20 percent of their qualified business income.

• The educational institution should be able to tell you if it is an eligible educational institution.
• This means you may have to report your new fortune on your annual tax return.
• It’s also possible to deduct refinancing points and other aspects of your home ownership costs, including property taxes.

The qualified business income (QBI) deduction provides pass-through business owners a deduction worth up to 20% of their share of the business’s income — though it does come with many rules and limitations. Of course, tax savings aren’t the only factor that goes into selecting a structure for your small business. Before changing your tax status, consult with a tax professional who can help you crunch the numbers and run a cost-benefit analysis. As a small business owner, you have several options for structuring your business. You can operate as a sole proprietor, partnership, limited liability company (LLC), S corporation or C corporation. Your business structure will impact how you file your small business taxes.

Tax Deductions For Homeowners: Your Breaks And Benefits

Potential strategies can include the use of tax-exempt securities and intentionally timing the sale of capital assets for maximum tax benefit. Find out what adjustments and deductions are available and whether you qualify. With home businesses becoming more popular and with a number of Americans starting side hustles, it’s no surprise that self-employment expenses are also becoming more popular. If you pay for your own health insurance, that counts as an “above the line” deduction. On top of that, you can deduct expenses related to your business, including Internet costs, office supplies, advertising, and travel.

• To lower your AGI for the year, you can defer part of your income to next year, buy investments that generate tax-exempt income, and contribute as much as you can to qualified retirement plans.
• Deciding whether to itemize or take the standard deduction is a big part of tax planning because the choice can make a huge difference in your tax bill.
• You may not immediately receive written communications in the requested language.
• You pay $9,300 in tuition and fees in December 2022, and your child began college in January 2023.

Then have enough withheld from the RMD to cover taxes on other income. That saves you the hassle of making estimated tax payments during the year. One of the easiest, and most common ways you can reduce your taxable income is by contributing to a retirement account. 401(k)s and Traditional IRAs are tax-deferred accounts, meaning you won’t pay taxes on the money you contribute. Instead, you’ll only be taxed when you make withdrawals years down the line.

great ways to invest your tax refund

The interest (5% simple) on this loan accrued while you completed your senior year and for 6 months after graduating. The loan is payable over 60 months, with a payment of $200.51 due on the first of each month, beginning November 2022. This is unpaid interest on a student loan that is added by the lender to the outstanding principal balance of the loan. Capitalized interest is treated as interest for tax purposes and is deductible as payments of principal are made on the loan. No deduction for capitalized interest is allowed in a year in which no loan payments were made.

The psychoanalytic training doesn’t qualify you for a new profession. It is qualifying work-related education because it maintains or improves skills required in your present profession. Education that is part of a program of study that will qualify you for a new trade or business isn’t qualifying work-related education. This is true even if you don’t plan to enter that trade or business.

As a starting point, you’ll have to decide whether to itemize your deductions or take the standard deduction. Generally, you’ll choose whichever method lowers your taxes the most. If you itemize, be aware that some deductions (for example, medical expenses) are allowed only to the extent the deduction exceeds some percentage of your adjusted gross income (AGI). In cases where your deductions are affected by your AGI, you might look at ways to potentially increase your allowable deductions by reducing your AGI. To lower your AGI for the year, you can defer part of your income to next year, buy investments that generate tax-exempt income, and contribute as much as you can to qualified retirement plans. In 37 economies this error will lead to a comprehensive review of the income tax return, requiring that additional time be spent by businesses.

Qualified education expenses (defined later) reduced by any tax-free educational assistance, such as a tax-free scholarship or employer-provided educational assistance. They must also be reduced by any qualified education expenses deducted elsewhere on your return, used to determine an education credit or other benefit, or used to determine a tax-free distribution. For information on a specific benefit, see the appropriate chapter in this publication. For purposes of the 10% additional tax, these expenses are tuition, fees, books, supplies, and equipment required for enrollment or attendance at an eligible educational institution. They also include expenses for special needs services incurred by or for special needs students in connection with their enrollment or attendance. For most taxpayers, MAGI is AGI as figured on their federal income tax return before subtracting any deduction for student loan interest.

The money you deposit isn’t deductible at the federal level, though some states may offer a tax break for 529 contributions. But the money in the account grows tax-deferred and withdrawals are tax-free when used for eligible educational expenses. For taxable years beginning on or https://turbo-tax.org/ after January 1, 2021, and before January 1, 2026, qualifying pass-through entities (PTEs) may annually elect to pay an entity level state tax on income. Qualified taxpayers receive a credit for their share of the entity level tax, reducing their California personal income tax.

This applies most clearly in the case of electing to claim a large depreciation deduction in the first year the property is in service, but can apply to losses from sales of capital assets as well. You should not use this strategy when you will be in a higher tax bracket in the coming year—either because your income will increase or because the tax rates will increase. You want to realize income in the year in which you will be in the lower tax bracket. Know the rules regarding which expenses are deductible and make sure to document them properly. Over-exuberant payment of personal expenses from business funds is a red flag for audits and may be considered proof of tax fraud.

Are you eligible for the home office deduction?

To claim the American opportunity credit, you must provide the educational institution’s employer identification number (EIN) on your Form 8863. You should be able to obtain this information from Form 1098-T or the educational institution. A little extra caution could save people additional time and effort related to filing an amended tax return, or responding to an inquiry from the IRS. An ITIN only needs to be renewed if it has expired and is needed on a U.S. federal tax return.

• You can search by location, credentials, and name of the preparer.
• The wealthiest now pay a top rate 37 percent on their taxable income, down from 39.6 percent.
• You might also consider investing in tax-exempt municipal bonds as a means of reducing taxes.
• You can use Worksheet 1-1 to figure the tax-free and taxable parts of your athletic scholarship.
• However, defined benefit plans won’t work for every high-income business owner.