- There are different tactics you can use to legally lower your tax bill.
- It's a good idea to map out a strategy at the start of the year.
- It might pay to purchase tools to help you with business taxes, and max out tax-advantaged accounts if you can.
These are all worth employing.
Once the new year kicks off, you might get busy trying to figure out how you'll tackle your resolutions -- things like boosting your savings balance and exercising on a regular basis. You may not be focused on taxes just yet, especially with the filing deadline not being until April.
But even if you're not ready to start thinking about taxes in January, you're probably eager to pay the IRS less money in 2023 than you did in 2022 if you can legally pull that off. And if you employ these strategies, you may find that it's a possibility.
1. Max out savings plans that come with a tax break
It's a smart idea to keep cash in a savings account so it can earn interest, and to invest in a brokerage account so you can grow wealth. But these accounts don't offer any tax benefits.
On the other hand, if you make a point to save for retirement in a traditional IRA account or 401(k) plan, you can benefit from a few different tax breaks. First, the money you put in will exempt a portion of your income from taxes. So let's say you make a $5,000 IRA contribution in 2023. That's $5,000 of earnings the IRS won't be able to touch.
Furthermore, if you earn money in an IRA or 401(k) through investment gains, you won't owe capital gains tax on those earnings. Rather, those taxes will be deferred until retirement, so you won't have to worry about them in 2023. Gains in a brokerage account, by contrast, are taxed the year you earn them.
2. Take losses in your brokerage account to offset gains and ordinary income
Maybe you have a stock in your brokerage account that hasn't done well since you bought it. Unloading that stock at a loss could work to your benefit from a tax standpoint.
First of all, you can use losses in your brokerage account to offset capital gains. But if you don't have capital gains to offset, or if your loss exceeds your gains in a given year, you can take that loss and use it to offset up to $3,000 of regular income. So either way, you lower your IRS bill.
3. Invest in tools for your small business or freelance gig
If you own a small business, are self-employed, or have a side hustle you do on a freelance basis, you may be thinking of purchasing tools or equipment to improve your efficiency. Doing so could serve as a tax write-off, so if you have reason to believe that your income will increase in 2023, then that's a good year to make those accounting purchases and take the associated deductions.
Start planning early
Although January may not be the most popular time to focus on tax-related matters, the sooner you establish a strategy for slashing your tax bill, the better. These moves could pave the way to a lower tax liability in 2023 -- and more money for you to bank instead.
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