No one wants to pay more taxes, and understanding how to strategize your tax planning to decrease what you pay is certainly not the most exciting. However, it is necessary if you want to reduce your overall tax liability.
Choosing the right tax strategies can result in you substantially lowering your taxes over the years, which can allow you to save and invest more into your assets and retirement savings.
Maximize Retirement Contributions
Your annual income tax will be based off of your gross income. A great way to reduce the amount you pay in tax dollars is to maximize your contributions to your retirement accounts. This can include your contributions to a traditional IRA, 401(k) contributions, or Roth IRA contributions. The effect of maximizing both serves two purposes: you reduce your tax liability while bulking up funds in your retirement accounts and increasing their value.
Employer-offered plans, such as a 401(k) plan, allow for contributions of pre-tax dollars to a specified amount. For 2023, the maximum amount is $22,500 annually, an increase from the 2022 limit of $20,500. Roth IRA contributions are increasing from $6,000 to $6,500. This is the first contribution increase since 2019, so investors should look to take advantage of the rising limit.
Those over 50 can use the catch-up contributions for each of an additional $7,500 for 401(k) and $1,000 for Roth IRA plan contributions.
If You Want to Reduce Your Taxes, Plan Ahead
It’s hard to accomplish anything without a plan. Reducing your tax liability is no different. As an executive in a high-earning position, it doesn’t quite matter your age, as you will be paying taxes for years and likely decades to come, likely in a much higher tax bracket than most people.
Because of your higher income and bigger career responsibilities as an executive, the need for an effective tax strategy is only more prevalent. Considering taxes are going to be an annual, perhaps quarterly occurrence, you need to plan ahead if you want to reduce your overall tax liability.
With higher contributions and earnings to consider, take advantage of all the tax-planning tools at your disposal, from charitable contributions, tax-loss harvesting tactics, and structuring your distributions in retirement in tax-friendly ways. Every financial decision should be done with a purpose, and tax planning should always be in the back of your mind.
With that being said, tax planning and choosing the right strategy can be difficult and time consuming. This is why many choose to work with a financial advisor, as the benefits are widespread and include:
● Advanced tax planning strategies
● Knowledge of the best distribution strategies for retirement income
● Ways to lower your tax burden while you are still working
● Retirement planning and investment advice
If you have any questions regarding your investments, retirement planning, or how to reduce your overall tax burden, contact one of the financial advisors at Brown | Miller and see how they can help today.
Increase Your Charitable Contributions
Charitable donations are another great way to reduce your tax burden. Tax-deductible donations made towards a qualified organization must be itemized on your tax return via a Schedule A form on an IRS Form 1040 or 1040-SR.
You can generally deduct up to 60% of your AGI (adjusted gross income) from donating to eligible charities. However, this number may actually be anywhere from 20-50% depending on the type of contribution and which charity you decide to donate to, as different organizations will have different rules for contributing. When you are making charitable contributions, keep in mind to:
● When donating to charities for the purpose of reducing your overall tax liability, always check to see that the organization qualifies
● Check with the organization to see how much of your donation will be tax-deductible
● Keep written documentation of all of your donations in case you are audited
● Remember that while you cannot deduct volunteer time, any expenses related to volunteering for a qualified organization may be tax deductible
Consider Tax Loss Harvesting
Tax loss harvesting is a strategy many investors use to lower their current taxes by intentionally selling investments at a loss and then using that loss to offset any taxes owed on another investment they hold that was sold at a profit, or capital gain, as well as taxes owed on any personal income.
It should be understood that the benefit of tax loss harvesting is tax deferral as opposed to tax reduction or elimination. Though you are allowed to deduct capital losses to offset any taxes that you owe on capital gains, it is a strategy that only works in specific scenarios. Since it can be tricky to determine if the strategy is right for your situation, consider consulting a CFP® professional to determine what the appropriate strategy should be for your situation.
What is a Roth 401k and is it Right For You?
A Roth 401(k) is an employer-sponsored retirement account funded using after-tax income. Income tax is paid immediately on earnings, and withdrawals are tax-free once you retire, just as they are with a Roth. This type of account differs from a regular 401(k), as a Roth 401(k) contribution is funded with after-tax money instead of pre-tax money.
A Roth 401(k), like a regular Roth, requires that you pay income tax immediately, resulting in your net income being reduced, and no other taxes will need to be paid on any future withdrawals. Any withdrawals from any contributions or earnings will not be taxed so long as it is a qualified distribution. The contribution limit is the same as if you were contributing to a 401(k) ($22,500 in 2023 and an additional $7,500 for catch-up contributions).
There are many benefits when you invest in a Roth 401(k) account, and it may make sense to do so if:
● You are currently in a lower tax bracket than you think you will be later in life, and plan on being taxed at a higher rate in the future
● You are a high-earner; there are no income limits for a Roth 401(k), and anyone can contribute
● You were planning on doing a Roth conversion anyways once you retire for the tax benefits