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Six Ways to Maximize Your Tax Refund

Six Ways to Maximize Your Tax Refund

December 15, 2022
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December is the time of year to start planning for 2023 and the upcoming tax season. This is an ideal time to set yourself up for success for next year's filing and incorporate tax planning strategies aimed to help you keep more of what you earn.

Here are Six ways to maximize your tax refund for 2023

  1. Determine Tax Withholdings on your Paychecks

 Withholding is the amount of income tax your employer pays on your behalf from your paycheck. Are you paying enough taxes throughout the year? If not, you’re likely going to be surprised when tax season comes around and you end up having to pay. The IRS has a Tax Withholding Estimator to estimate the federal income tax you want your employer to withhold from your paycheck. The results from this calculator will help you determine if you need to fill out a new W-2 Form from your employer to update your withholdings accordingly. 

  1. Tax-Loss Harvesting

 Tax-loss harvesting can be used to offset capital gains by selling an asset at a loss, and it’s a helpful practice to reduce your taxable income. However, not all financial advisors deploy a tax-smart approach to managing your investments, which can cost you money in the long run. Keep in mind that the return and principal value of securities will fluctuate as market conditions change and past performance is no guarantee of future returns.1 While this doesn’t get rid of your losses, it can be an approach to managing your tax liability.

  1. Max out your Retirement Accounts

 A 401(k) is commonly used as individuals can take advantage of employer contributions. The 2023 employee elective deferral is $22,500, up $2,000 from 2022. These limits are subject to change due to cost-of-living adjustments. However, these limits do not apply to employer matches. For example, an individual can max out their 401(k) in 2023 at $22,500, but if their employer matches 5%, then their 401(k) contribution for that year is $23,625.

There are some exceptions to this rule, however. In 2001 congress passed a law that can help older workers make up for lost time. The “catch-up” provision allows workers who are over age 50 to make contributions to their qualified retirement plans in excess of the limits imposed on younger workers. In 2023, individuals over 50 may be eligible to contribute an additional $7,500 to their 401(k). Setting aside an extra $7,500 each year into a tax-deferred retirement account has the potential to make a big difference in the eventual balance of the account and in the eventual income the account may generate.

  1. Take Advantage of Tax-Free Growth

 Another way to reduce your taxable income is by increasing your retirement account contributions or consider a Roth IRA. A Roth IRA conversion can be a valuable tool for lowering your taxes over a period of time, but whether it's the right move for you depends on your unique financial situation. For a Roth IRA, contributions you make are on an after-tax basis and withdrawals are tax-free and allow you to turn a traditional IRA or 401(k) plan account into a Roth. One of the primary benefits of a Roth IRA is that your contributions and earnings can grow tax-free and be withdrawn tax-free after age 59 ½, as long as the account has been open for at least five years.

To add an additional layer of novelty, the Internal Revenue Service has released new limits for the coming year. After months of high inflation and financial uncertainty, some of these cost-of-living-based adjustments have reached near-record levels. Here is a high-level overview of these changes:

  • Individual Retirement Accounts (IRAs) - IRA contribution limits are now $6,500, up $500. Catch-up contributions for those over age 50 remain at $1,000, bringing the total limit to $7,500.
  • Roth IRAs - The income phase-out range for Roth IRA contributions reached a $9,000 increase, $138,000-$153,000 for single filers and heads of household. For married couples filing jointly, phase-out will be $218,000 to $228,000, a $14,000 increase. Married individuals filing separately see their phase-out range remain at $0-10,000.
  • Workplace Retirement Accounts - Those with 401(k), 403(b), 457 plans, and similar accounts will see a $2,000 increase for 2023, the limit rising to $22,500. Those aged 50 and older now could contribute an extra $7,500, bringing their limit to $30,000.
  • SIMPLE Accounts - A $1,500 increase for 2023 gives individuals contributing to this incentive match plan a $15,500 stoplight.

In addition to changes in contributions limits, the IRS also announced several other changes for 2023, including an increase to the annual exclusion for gifts to $17,000 per person and an increase to the estate tax exclusion threshold.

Consult with your tax professional before making any changes in anticipation of the new 2023 levels.

  1. Taking your IRA Minimum Distribution.

Your IRA required minimum distribution (RMD) is the minimum amount you must withdraw from your account each year. Generally, you must start withdrawing from your IRA, SEP IRA, SIMPLE IRA, or retirement plan account when you reach age 72.

There are some exceptions to this rule. In December 2019, the SECURE Act became law and made a major change to the RMD rules. If you retired at the age of 70 ½ in 2019, you must have taken your first RMD by April 1, 2020. If you reach 70 ½ in 2020 you must take your first RMD by April 1st of the first year after you reach 72.

You can calculate the amount of your IRA required minimum distribution using worksheets from the IRS. You must carefully calculate your RMDs for each IRA you own other than any Roth IRAs. You risk facing a 50 percent excise tax on any RMD that you fail to take on time. By working with our team of tax-smart advisors we can assist you with determining your specific distribution amount.

Individuals may run into issues when inheriting an IRA. An inherited IRA can be one of the most complex issues to handle when wrapping up an estate, and the wrong move can lead to costly consequences. Typically, an heir will move assets from the original owner’s IRA into a newly opened IRA. When you inherit an IRA, there are almost too many avenues to take depending on the situation. It’s important to sit down with your financial advisor and tax professional so you make the right choice that doesn’t end up hurting you financially.

  1. Qualified Charitable Distributions (QCD)

A Qualified Charitable Distribution (QCD) can provide tax savings to individuals and couples aged 70 ½ and older. Starting at age 72, the IRS requires annual withdrawals called Required Minimum Distributions (RMDs) from tax-deferred retirement accounts, such as IRAs. Rather than taking these withdrawals directly and potentially moving into a higher tax bracket, a QCD allows a direct transfer of funds from your IRA to a qualified charity and satisfies your RMD for the year. This is a great avenue individuals can take that can come with taxable benefits.

We speak finance in your language

I encourage you to reach out to our team so we can evaluate your unique financial situation and what your goals are, so we can select the right tax-smart financial strategy for you. At Paxel Financial, we strive to create a legacy for financial success!

 


1 - Investopedia.com, February 26, 2019