When aiming to save on taxes, certain investment actions should be done by December 31 of the tax year, like tax-loss harvesting. However, there are additional strategies investors can implement between the end of the year and tax day to reduce their taxes for the previous year. You may have plenty of tax questions in your mind.
Discover four investment strategies you can undertake before tax day (April 15) to lower your 2023 taxes.
Investments that may reduce your taxes before tax day
How to reduce taxable income
- Contribute to a traditional IRA
One way to potentially reduce your tax bill is by contributing to a traditional individual retirement account (IRA). These contributions can lower your taxable income and save you money on your taxes if you’re eligible for the deduction. Whether or not you can take a tax deduction for traditional IRA contributions depends on your income level. Single filers can take at least a partial deduction if their income is below $83,000, while married couples who file a joint tax return can take at least a partial deduction if their income is below $136,000. If you’re single or married and neither you nor your spouse are covered by a workplace retirement plan, there are no income restrictions on taking the tax deduction.
Once you’ve contributed to an IRA, the money can be invested and grow tax-deferred until it’s withdrawn during retirement. Using an IRA is a great way to supplement your workplace retirement plan, such as a 401(k). You can also make Roth IRA contributions up until tax day, but these contributions are made with after-tax dollars, meaning you won’t get a current tax deduction. Roth IRA tax benefits come during retirement when withdrawals are tax-free.
For 2023, the IRA contribution limits are as follows:
Tax Year 2023: $6,500 if you’re under age 50 / $7,500 if you’re age 50 or older.
Tax Year 2024: $7,000 if you’re under age 50 / $8,000 if you’re age 50 or older.
Remember that these limits may vary based on your income level and filing status. It’s essential to consult with a financial advisor or refer to official IRS guidelines for accurate information on IRA contribution limits for each tax year. - Spousal IRA contributions
Many individuals miss out on the chance to make spousal IRA contributions when one spouse has limited or no earned income. However, if one spouse has earned income, both partners can contribute to an IRA, potentially doubling the available tax deduction.
Do you have a qualified retirement plan or qualified pension plan?
If your business didn’t have a 401(k) or another qualified retirement plan in place for 2023, there’s still an opportunity to establish one and fund it to reduce the tax impact on your profits. For instance, you can create a SEP (Simplified Employee Pension) and make deductible contributions for 2023 until the due date of your return or the extended due date if you’ve requested an extension. Explore your retirement plan options in IRS Publication 560.Conduct a cost-benefit analysis: consider the tax savings, the employee benefits provided by the plan (if certain conditions are met), and weigh them against the costs of setting up, funding, and managing the plan.
For example, let’s consider a scenario where a married couple, both aged 45, has one spouse earning $100,000 from a full-time job and the other earning $5,000 from a part-time job. Each spouse can contribute up to $6,500 to a traditional IRA for 2023, creating a potential tax deduction of $13,000. Couples aged 50 and above can contribute up to $7,500 each for the 2023 tax year.
Lowering your taxable income through an IRA contribution can have additional benefits due to income thresholds for various taxes. It’s advisable to seek guidance from a financial advisor or tax professional as the rules can be complex.
Best key points to consider:
The couple must have earned income equal to or greater than the total IRA contribution.
Filing a joint tax return is necessary.
If neither spouse is part of a workplace retirement plan like a 401(k), there are no income restrictions for claiming the tax deduction. For couples covered by such a plan, deductions are determined by income levels.Moreover, making contributions to a Health Savings Account (HSA) before tax day presents a triple-tax advantage. HSAs offer a tax deduction for contributions, tax-free investment growth, and tax-free withdrawals for qualified medical expenses. However, withdrawals for non-medical expenses during retirement will incur taxes.Key points to note:
Enrollment in an HSA-eligible health plan is necessary to contribute to an HSA.
Contribution limits for 2023 stand at $3,850 for individuals and $7,750 for families, with an additional $1,000 allowance for individuals aged 55 and above.
Total contribution limits are influenced by employer contributions.
- Contribute to a health savings account (HSA)
You can still make contributions to Health Savings Accounts (HSAs) up until tax day. HSAs offer a triple-tax advantage: a current tax deduction for contributions, tax-free investment growth, and tax-free withdrawals for qualified medical expenses. Plus, you can withdraw the money penalty-free for any reason during retirement. However, withdrawals for non-medical expenses will be taxed.
How to reduce taxable income with a side business ?
You have plenty of options to choose side business ventures to grow your income and reduce your taxes. These are some of the best side businesses to consider for more tax write-offs.
1. Rental Property
Investing in rental properties can be a great way to create wealth because these generate income. It can definitely help in reducing your tax burden by allowing you to deduct various expenses, such as mortgage interest payments, property taxes, insurance premiums, repairs, and maintenance. Investment properties offer more write-offs than primary residences. You can also write off depreciation each year, which can be substantial depending on how you calculate depreciation.
2. Online Freelancing
Exposing yourself in freelancing work offers lot of opportunities across different skill sets. Whether you write for clients, create designs, handle social media accounts, or take on other roles, online freelancing is versatile. This profession also provides access to additional tax deductions that are typically unavailable to employees. Your internet and phone bills become legitimate business expenses as they are essential for running your online freelance business.
Many more options are there to generate side incomes that can lower your tax burden, i.e, Fitness or Wellness Coaching, Blogging or Vlogging, Event Planning or Catering, Photography or Videography, Online Course Creation and more.
Anyway, if you are done with above all, you can estimate your tax refund by using below tools:
1. Free Tax Return Calculator by SmartAsset
2. taxable income calculator tool by Calculator.net
3. Federal Income Tax Calculator and Refund Estimator 2023-2024
These are the some tools which help you to calculate your income tax refunds.