How To Reduce Taxable Income
While a higher income has allowed you to take trips or purchase the electronics you've had your eye on, rising inflation this year may have nudged you into a new tax bracket. Tax-bracket creep is when your salary bump helps you keep up with the rising costs of living, putting you in a higher tax bracket. However, there are measures you can take to reduce taxable income. Some strategies require you to itemize instead of taking the standard deduction, but the extra work may be worth the reward. Learn how to reduce taxable income with IntentGen.
Tax Optimization Tips
Taxes are a natural part of life. However, there are plenty of avenues you can take to help reduce your taxable income and the taxes you’ll pay for the upcoming tax season. Keep in mind that a tax credit is a dollar-for-dollar reduction, while a tax deduction reduces how much income gets taxed. Either way, these tax optimization tips for tax credits and deductions can help you save on your taxes. Here are a few tips for how to reduce taxable income:
Contribute to Your 401(k)
When you maximize your retirement contributions, the IRS doesn’t tax what is diverted from your paycheck to your 401(k) account. For the 2023 tax year, the maximum contribution of $22,500 with an extra $7,500 worth of contributions for people over 50 years old.
Contribute to an HSA Account
If you have a high-deductible healthcare plan, your tax-exempt account can help lighten your tax load. Contributions for individuals are limited to $3,500 for the 2023 tax year, while families can contribute up to $7,750. Contributions to the account are tax-deductible, and withdrawals are tax-free as long as they are used for medical expenses.
See If You Are Eligible for an Earned Income Tax Credit (EITC)
Although the qualifications for the EITC can be complex, it’s worth looking into if you believe you’ll make less than $63,398 in 2023. Depending on your marital and dependent status, you may qualify for a credit of up to $7,500.
When you do some spring cleaning or donate food and household items you don’t use anymore, you help reduce taxable income with those donations. Charitable deductions don’t have to be in cash; they just have to be made to a reputable charity and include a receipt for your records. If you itemize your taxes instead of taking the standard deduction, you can deduct between 20% and 60% of your adjusted gross income for the 2023 tax year.
Defer Payments and Payouts
One tax optimization tip is simple: strategically reduce the income you receive. If you have large payments coming, like severance from a job layoff or money from a sold house, deferring income into the next year may keep you out of the higher tax bracket. However, keep in mind that you have to consider next year's taxes along with the amount deferred. You may still be pushed into a higher bracket in the future.
Be sure to keep your timing in mind; there’s a lot to consider and keep track of when filing your taxes. When you know certain expenses can be deducted from your income tax, it makes a big difference if you pay them on December 31st instead of a day later. Use our tax efficiency checklist to ensure you have everything in order.
Learn More Tax Tips with IntentGen!
At IntentGen, we aim to help you manage your money so you can enjoy the activities you love. Learn more about how income tax works, and contact us if you have questions about how to reduce your taxable income.