2023 Tax Tips Everyone Should Know

Whether you are a CPA, CFA, or a valued member of the PTA, here are some 2023 tax tips everyone should know.

Similar to last week's post regarding personal finance and bean counting, this week's post is also a topic that isn't first on my list of favorite things to do. And while every year is a good year to sharpen your saw regarding taxes, 2023 especially has some twists and turns with new tax laws that need some attention.

The 2023 tax tips below are universal. By this, I mean that they apply to everyone at just about one stage in life or another. But there are a few, for the small business owner or the high net worth family in particular, that may be of interest to a more specific audience.

Taxes have significant implications on the outcome of your financial plan. Not having the desire to understand tax implications at all would be like trying to build a championship football team with no real desire to improve your team's blocking and tackling.

Taxes, like football, have basic fundamental elements that if not understood and addressed, can prevent the person, like the team, from reaching their potential. Do you want to have success with your financial plan? Then start here with these 2019 tax tips.

2023 Contribution Limits for Retirement Accounts

Know your limits. Knowing your contribution limits enables you to optimize your financial planning. 

• The annual IRA contribution limit under age 50 is $6,500. The annual IRA contribution limit for ages 50 or older is $7,500
• Annual 401(k), 403(b), and most 457 salary-deferral limits are $22,500. If you are over the age of 50, you may defer $30,000
• The annual additions limit under a defined contribution plan is $66,000
• The includable compensation for computing contributions is $330,000
• The annual compensation for determining a highly compensated employee (used in 401(k) nondiscrimination tests) is $150,000.

Taxable Retirement Distributions

If you are preparing for retirement, prepare to pay some taxes. While your IRA and 401(k) grow tax-deferred, during distribution at the age of 59 ½ or beyond your withdrawals are considered taxable income. If you haven't already, you may want to seek out a financial planner to run projections on your IRA distributions in retirement, as well as your Social Security, other part-time employment, rental property income, etc.

IRA and 401(k) Tax Basics

• Money in a traditional IRA grows tax-deferred, but it is subject to federal and state income tax upon withdrawal.
• Money in a 401(k) grows tax-deferred but is subject to federal and state income tax upon withdrawal.

2023 Estate Planning Tips

Estate planning is friendlier than it used to be. I remember when the estate tax applicable exclusion was one-fourth of what it is today. While you can't control when you die, you can be prepared to leave your wife, significant other, kids, or charities, less of a mess.

If you have built up a net worth that is north of $11 million, chances are that you are incredibly gifted, and have a unique set of financial skills. Please don't assume that the rest of your loved ones possess the same skill sets. Help them most by planning now.

• The annual gift tax exclusion is $17,000
• Top gift, estate, and generation-skipping transfer (GST) tax rate is 40%
• Gift tax and estate tax applicable exclusion amount is $12,920,000 + DSUEA*
• GST tax exemption is $12,920,000**

2023 Tax Tips for New Business Owners

New business owners beware. The tax tips below are reminders of what many business owners forget from time to time.  

• Combined Social Security and Medicare payroll tax is 7.65%. If you are an employee, you pay 7.65% and then your employer pays 7.65%. However, if you are a business owner you have to pay BOTH portions, for a total of 15.3%.
• Payroll tax (AKA self-employment tax, or SECA) and income tax are separate animals. First, be aware that you are responsible for the 15.3% self-employment tax (SECA). Secondly, be prepared to determine what your federal and state income tax will be in ADDITION to the SECA. If you didn't plan on this much tax, don't panic. You are not the first one to overlook it. Your CPA will help you figure it out.

Rent /Sell Your Home for Tax-Free Money

If you have read this far in this week's post; here is the desert. In an era of Airbnb, this 2023 tax tip regarding real estate information is one to consider.

• There's an IRS special rule if you use a dwelling unit as a residence and rent it for fewer than 15 days per year. In this case, you don't have to report any of the rental income. If you go on a vacation or two a year, why not rent your home out and earn some extra tax-free money? I live in Wilmington, NC, and in the summer even a modest home could bring in a rental income of over $2,000 per week. If you live in a marquee area such as Wrightsville Beach proper, you may get $4,000 to $6,000 per week or more. It's one of the best deals around for income tax-free profit. 

• If you have a capital gain from the sale of your main home, you may qualify to exclude up to $250,000 of that gain from your income, or up to $500,000 of that gain if you file a joint return with your spouse. IRS Publication 523, Selling Your Home, provides a better understanding. and worksheets. IRS Publication 409 covers the fundamentals of capital gains and losses.

We hope these tips take some of the monotony out of your tax planning this year. Use them to optimize your financial plan.

*Basic exclusion amount plus deceased spousal unused exclusion amount (DSUEA). Exclusion is portable.

** The GST tax exemption is not portable.

About the Author

Jeff Headrick is the Founder and CEO of Inspire Financial Planning. When Jeff was still in his teens his father died unexpectedly. While his father was a hard worker and a good provider, he did not have the best financial plan in place when he died. This personal experience, coupled with being inspired by Sir John Templeton, Warren Buffett, Dave Ramsey, and the laws of compound interest, prompted Jeff to enter the financial services industry in 1999. He has been helping people with their financial planning ever since.

Jeff lives in Wilmington, NC with his wife and two children. He spends most of his spare time just across the Intracoastal Waterway in Wrightsville Beach, enjoying the beauty of the NC Coast.

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