Individuals and small businesses should consider various ways of starting off on the right foot for the 2023 tax year. While the list below is a great start, the most important of these actions is keeping timely and accurate tax records.
Top Considerations for Starting the 2023 Tax Year Right
W-4 Updates
Employed? If so, then your employer takes the information from your Internal Revenue Service (IRS) Form W-4 and applies it to the IRS’s withholding tables to determine the amount of income tax to withhold from your wages in each payroll period.
However, if your 2022 refund or balance due turns out not to be the desired amount, you may want to consider adjusting your withholding based on your projected tax for 2023. If you need assistance, please call this office.
W-9 Collection
If you are operating a business, then you are required to issue a Form 1099-NEC to each service provider to which you have paid at least $600 during a given year. It is a good practice to collect a completed W-9 form from every service provider (even if you are paying less than $600), as you may use that provider again later in the year and may have difficulty getting a W-9 after the fact—especially from providers that do not plan to report all of their income for the year.
Estimated Tax Payments
If you are self-employed, then you prepay each year’s taxes in quarterly estimated payments by sending 1040-ES payment vouchers or making electronic payments. For the 2023 tax year, the first three payments are due on April 18, June 15, and September 15, 2023, and the final payment is due on January 16, 2024. Generally, these payments are based on the prior year’s taxable income; if you expect any significant changes in either income or deductions relative to the previous year, please contact this office for help in adjusting your payments accordingly.
Charitable Contributions
If you marginally itemize your deductions, then you can employ the bunching strategy. This involves taking the standard deduction one year but itemizing your deductions in the next. However, you must make this decision early in the 2023 tax year so that you can make two years’ worth of charitable contributions in the bunching year.
Required Minimum Distributions (RMDs)
Each year, if you are 73 (a recent law change increased it from 72 in 2022) or older, you must take a required minimum distribution from each of your retirement accounts or face a substantial penalty. By taking this distribution early in the year, you can ensure that you do not forget and accidentally subject yourself to penalties.
Gifting
Looking to reduce your estate-tax exposure? Or perhaps you just want to give some money to family members? Just know that each year, you can gift up to an inflation-adjusted amount to each beneficiary without affecting your lifetime estate-tax exclusion amount or paying a gift tax. For the 2023 tax year, that amount is $17,000.
Retirement Plan Contributions
Review your retirement plan contributions to determine whether you can afford to increase your contribution amounts. Also, to make sure that you are taking full advantage of your employer’s contributions to the plan.
Beneficiaries
Marriages, divorces, births, deaths, and even family clashes all affect whom you include as a beneficiary. Consider periodically reviewing the following:
- Will or Trust
- Retirement plans
- Insurance policies
- Property holdings,
- Any other investments
to be sure that your beneficiary designations are up to date.
Reasonable Compensation
With the advent a few years ago of the 20% pass-through deduction, the issue of reasonable compensation took on new importance. Particularly for shareholders of S corporations. This has been a contentious issue in the past. Mainly as it has allowed shareholders who are not just investors but those working in the business to take a minimum salary (or no salary at all) so their income passed through the K-1 as investment income.
This strategy allows such shareholders and the S corporation to avoid payroll taxes on income that should be treated as W-2 compensation. A number of issues factor into a discussion of reasonable compensation. These include comparisons to others working in similar businesses and to employees within the same business, as well as the cost of living in the business’s locale. And this is a subjective amount. The amount generally must be determined by a firm that specializes in making such determinations.
Business Vehicle Mileage
Generally, vehicles with business use also have some amount of nondeductible personal use in a given year. A good practice is to record a vehicle’s mileage at the beginning and at the end of each year. That way you can more easily determine its total mileage for that year. The total mileage figure is then used when prorating the personal- and business-use expenses related to that vehicle.
College Tuition Plans
Contribute to your child’s Section 529 plan as soon as possible. The funds begin accumulating earnings as soon as they are in the account. This is important because the student will likely begin using that money at age 18 or 19.
Only a few of the tax-related actions that you take during a year will benefit yourself or others. The most important of these actions is keeping timely and accurate tax records. Accurate and consistent record keeping is the most important for businesses in particular. Those who have well-documented income and expense records generally come out on top when the IRS challenges them.
If would like an appointment for tax projections or tax planning, please contact this office.
Wonder What A Tax Deduction Is Worth?
