With 2023 here, one thing that you want to consider when retirement planning is taxes. You never want to spend more money on taxes than necessary, and that’s why we’re starting this year off by walking you through tax tips.
10 Tax Tips to Start 2023 Off Great
1. Take Advantage of Tax-free Income
Tax-free income is ideal, and you likely have:
You may have to pay taxes on all of these sources of income. However, you may have tax-free income that you can begin to take:
- Roth IRA distribution (not the ideal source of income to start off retirement)
- Savings
Using savings for your source of income this year can help you with Roth conversions, avoiding capital gains or Social Security payments, too.
If you consider where your income is coming from, it will allow you to at least leverage tax-free income to your advantage this coming year.
2. Consider Traditional to Roth IRA Conversions
Converting a traditional IRA account to a Roth account may be in your best interest. First, you can allow your money to grow tax-free. Second, if someone inherits these accounts, they benefit from the tax-free account, too.
You will need to pay taxes during the conversion, and this hits on point 1, too.
If you can use tax-free income during the year of your conversion, you may be able to stay in a lower tax bracket and save money on taxes.
3. Review Your Tax Withholding
If you’re early in retirement, you might find yourself:
In both cases, it’s better to be right on the mark with your taxes. If you overpay, there’s no penalty, but you also can’t grow this money if it’s in the government’s hands. We can review these withholdings with you to ensure that you’re not paying too much or too little to the government.
4. Track Medical Expense Deductions
Medical expenses may or may not be deductible, but you need to have these expenses outlined in either case. You can deduct some of these expenses, and your accountant will need this information to know if itemizing and medical expenses can reduce your tax burden.
5. Take Advantage of Charitable Contribution Deductions
If you don’t itemize your taxes, you may still be able to leverage charitable contributions. You may be able to use:
- Qualified charitable distributions, which will take money from your IRA directly and gives it to charity without the money ever hitting your bank account.
- Donor-advised funds. You can stack your contributions over a multi-year period into a single year to reduce your taxes if you use one of these funds.
Anyone who is charity inclined can take advantage of their charitable contributions to reduce their taxes.
6. Don’t Forget About Quarterly Payments
Quarterly payments are foreign to a lot of people who are just transitioning to retirement. You may have gains throughout the year that are realized, and the government can assess a penalty because they expect to be paid on this gain as it happens.
For example, if you sell a stock or a house, you may need to make a quarterly payment.
Sitting down with your accountant or tax advisor can help you better understand if you need to make quarterly payments or not.
7. Don’t Forget About State Taxes
State taxes must be considered, too. It’s easy to focus on your federal taxes and forget that the state wants their money, too. If you do live in a state that collects income tax, keep this in the back of your mind throughout the year.
8. Consider Part-time Work
When you’re planning for retirement, you may or may not consider part-time work. A lot of our clients become consultants and others will take on a part-time job to stay busy, cover medical insurance or just generate some additional income.
Working part-time may also open the doors for other things, such as:
- Eligibility to contribute to retirement plans
- Taking advantage of benefits
- Traveling more during retirement
9. Don’t Forget About Required Minimum Distributions
Folks who are 72 or older will need to take their required minimum distributions (RMDs). You can take a monthly payment or a full payment upfront, too. In all cases, you need to make sure that you’re meeting the RMD thresholds every year.
If you’re just turning 72, we highly recommend giving us a call at (919) 787-8866 to discuss RMDs and to better understand how much you need to take out of these accounts each year.
10. Keep Track of Your Tax Documents
You’ll begin receiving mail in February that you need to compile together and give to your accountant. If you don’t keep track of these documents, you’ll need to scour for them rapidly, which is never fun.
A few of the documents that you’ll receive include:
- 1099s from investment accounts
- 1099s from Social Security
- W-2s
Organizing all of these documents is a great way to start the year, whether you’re working with a CPA or doing taxes yourself. It’s good practice to have a system in place to manage all of your taxes, receipts and similar documents throughout the year.
Being fully prepared when going to your CPA will make taxes a lot less stressful in 2023.
We hope that these tax tips will help you go into the year with confidence, knowing that you have everything in order to meet your tax obligations but never pay more than necessary.
If you have any questions, please feel free to schedule a call with us today.
