PREPARING FOR THE 2023 TAX SEASON Mar 2024
As we enter tax season, many Americans mistakenly think their tax obligations were fixed on December 31st for the 2023 filing year. However, there are several proactive measures still available to you that can reduce your 2023 tax burden and simplify the tax preparation and filing process.
Get Organized
For many, assembling all tax-related documents may very well be the most cumbersome part of tax season. Getting organized may not reduce your tax burden, but taking the time to get everything in order early will make the rest of the process much easier.
- Obtain social security numbers or taxpayer IDs for all parties on your return.
- Assemble the documents needed to chronicle income, interest, and withheld taxes, including W-2s, 1099s, schedule K-1s, and social security documents.
- Gather items that may help substantiate itemized deductions, including mortgage interest statements, charitable donation receipts, health care expenses and property tax expenses (real estate and vehicles).
- Gather relevant life-event documents, such as those evidencing births, marriages, deaths, divorces, adoptions, and alimony payment records.
- If you purchased or sold a house, collect your closing documents and home improvement receipts.
- Compile your bank account and routing numbers to configure direct deposit of refunds, offering the quickest method to receive your return and avoid potential mail-related issues.
CONTRIBUTE TO RETIREMENT ACCOUNTS
You have until the tax filing deadline to fund your retirement account for 2023 if you haven’t already done so. This deadline applies to contributions to both traditional and Roth IRAs, regardless of whether they are deductible. For those with Solo 401ks, Keoghs, or SEP accounts who received a filing extension until October 15, 2024, there’s an option to wait until then to make 2023 contributions.
To qualify for the full IRA deduction in 2023, you cannot be eligible to participate in a company retirement plan. If you are eligible, your adjusted gross income must be less than $73,000 for a single filer, or less than $116,000 for those married and filing jointly. If you are not eligible for a company plan but your spouse is, your traditional IRA contribution is fully deductible, as long as your combined gross income is less than $218,000.
For 2023, the maximum contribution to an IRA is $6,500 ($7,500 for those aged 50 or older by December 31, 2023). Self-employed individuals can contribute up to $66,000 annually to Solo 401ks, SEPs, and Keoghs, with an additional catch-up contribution of $7,500.
Contributions to a ROTH IRA will not reduce your 2023 tax burden; however, a ROTH IRA offers tax-free growth on investments and tax-free withdrawals in retirement, providing potential long-term savings benefits. To contribute $6,500 in 2023 ($7,500 for those aged 50 or older by December 31, 2023) to a Roth IRA, your modified AGI must be less than $138,000 for single filers or less than $218,000 for those married and filing jointly.
It is worth noting that you may choose to convert current IRA funds to a ROTH IRA, but doing so will require recognition of the entire converted amount as ordinary income for the year of conversion. This strategy is worth exploring as current tax laws are set to expire at the end of 2025, which could lead to considerably higher tax rates in future years when required minimum distributions (RMDs) may be mandated for your non-ROTH qualified funds.
REMEMBER TO TAKE YOUR RMDs
If you are 73 years old or older, you are required to take Required Minimum Distributions (RMDs) during the calendar year. Ensuring timely RMD withdrawals will avoid a penalty amounting to 25% of the RMD. However, if you reached the age of 73 in 2023, your first RMD is due by April 1 of the year following the year in which you turned 73.
ITEMIZE VS. TAKING THE STANDARD DEDUCTION
For 2023, the standard deduction is $13,850 for single filers and $27,700 for married couples filing jointly. The Tax Cuts and Jobs Act of 2017 doubled the standard deduction and reduced the amount of available deductions, leading to an estimated 90% of taxpayers opting for the standard deduction.
Itemizations fall into 4 categories in 2023. Do your combined itemized deductions equal more than the standard deduction for 2023?
- State and Local Income Taxes (SALT): The deduction for state and local income taxes, property taxes, and real estate taxes is capped at $10,000.
- Mortgage Interest Deduction: The mortgage interest deduction is limited to $750,000 of indebtedness; however, people who had $1,000,000 of home mortgage debt before December 16, 2017, are grandfathered and will still be able to deduct the interest on that loan.
- Medical Expenses: Only medical expenses that exceed 7.5% of adjusted gross income (AGI) can be deducted in 2023.
- Charitable Donations: In 2023, the annual income tax deduction limits for gifts to public charities or donor-advised funds are 30% of AGI for contributions of appreciated securities and 60% of AGI for contributions of cash. Contributions to private foundations are capped at 30% of your AGI for cash contributions and 20% for contributions of appreciated securities.
IS A HOME OFFICE TAX DEDUCTION AVAILABLE TO YOU?
The criteria for claiming a home office deduction have been relaxed, allowing more self-employed individuals to qualify for this benefit. Those without a fixed business location may now claim a home office deduction if the space is used for administrative or managerial tasks, even if it’s not used for meeting clients. As always, it is important to ensure the space is used exclusively for business purposes.
While some taxpayers have avoided this deduction in the past due to audit concerns, if you legitimately meet the criteria, there should be no issue. Eligible expenses for the deduction include rent, utilities, insurance, and housekeeping related to the portion of your home used exclusively for business, with the deductible percentage based on the office’s square footage relative to the total house area.
ENSURE YOU FILE ON TIME
The deadline for most Americans to file their 2023 tax returns is April 15, 2024. However, if you are unable to meet this deadline, you still have alternatives:
- Requesting an extension: Filing for an extension can push out your deadline by an additional six months, giving you until October 15, 2024 to submit your complete return. If you anticipate owing taxes, it’s essential to estimate the amount owed and make the payment along with your extension form.
- Filing a late return without an extension: If you don’t owe taxes or expect a refund, you may not incur a penalty for filing late. However, if taxes are owed, there could be penalties for the delay. It’s advisable to file as soon as possible to expedite the refund process or avoid potential outstanding balances.
If you miss the deadline, the IRS can enforce a late filing penalty of 5% per month of the tax owed (capped at 25%) and a late payment penalty of 0.5% of the tax due (capped at 25%).
FIND A REPUTABLE TAX PREPARER TO HELP
Filing taxes is hard. On the US income tax system, Albert Einstein was famously quoted as saying: “the hardest thing in the world to understand is income tax.” Numerous self-help tax filing platforms are available; nevertheless, hiring a qualified tax preparer is like buying insurance for accurate filings and protection against audits.
Before choosing to pay someone to prepare your taxes, here are a few things to consider:
- Ask for referrals. Referrals are often considered the best way to find a professional because they come from trusted sources who have firsthand experience with the individual or service being recommended. Additionally, referrals can offer insights into the specific needs and preferences of the person seeking the service, helping to ensure a good match between client and professional. Your Miracle Mile Advisor would be happy to recommend a tax preparer for you.
- Make sure the tax preparer is a good fit. Certainly, it’s important to establish alignment with the individual tasked with managing your personal financial documents. By asking a few questions, you can effectively assess whether the CPA is a suitable match for your needs.
- Ask if your tax preparer will be available after April 15th in case you need follow-up help with your taxes.
- The Fees you incur typically correlate with the intricacy of your tax return. For instance, if you possess diverse income streams such as self-employment, claim specific tax credits, or have experienced life changes throughout the year, your fees are likely to be higher compared to a simpler return.
- Verify the preparer’s qualifications and history. To check a preparer’s credentials, the IRS publishes a directory of federal tax preparers (https://irs.treasury.gov/rpo/rpo.jsf). You may also inquire with your local Better Business Bureau about the preparer.
- Make sure that your tax preparer has a preparer tax identification number (PTIN). By law, all tax preparers must sign returns and include their PTIN on all returns they file.
- Steer clear of preparers who boast they can obtain larger refunds than the competition.
If you require additional information or wish to discuss your unique circumstances, don’t hesitate to contact the Miracle Mile Advisors Team.
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Disclosures: Miracle Mile Advisors LLC (“MMA”) is a registered investment advisor. Advisory services are only offered to clients or prospective clients where MMA and its representatives are properly licensed or exempt from licensure. Miracle Mile Advisors and its affiliates do not provide tax, legal or accounting advice. This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, tax, legal or accounting advice. You should consult your own tax, legal and accounting advisors before engaging in any transaction.