One of the last things we want to think about as we finish off the holiday ham are taxes. But in years where you see your income hike, now is the time to take advantage of the last-minute tax maneuvers for 2023.
It’s not a surprise, but tax time has become one of the most stressful days for business owners. The tax software FreshBooks found in a survey that 80% of small business owners found tax time to be stressful. Another 63% rate their stress as a three out of five or higher in the lead up to the mid-March or April filings.
In truth, if you want an easier tax season, then now is the time to take some steps to ease what you owe to Uncle Sam.
While these strategies don’t work for everyone, when you’ve had a strong year from an income or business standpoint, these tactics can reduce the impact on personal finances. And, in some cases, you only have until the ball drops on 2023 to make them work for April.
Bring forward 2024 business expenses
For most businesses, it’s not a matter of when you use an item to declare a business expense. Instead, it’s a matter of when you paid for it.
If you had a relatively good year, this gives you an opportunity to reduce your taxes by bringing forward 2024 expenses into 2023.
This has value because business expenses reduce your overall income that you declare. By doing so, you’re reducing all the calculations that your accountant uses to reach your adjusted gross income and, therefore, it can play a big role in cutting what you owe.
You can bring forward expenses in many different ways. Have an eye on a new desk? Now’s the time to buy. Do you know you will pay for a software subscription monthly in 2024? See if you can pay the full year now.
You want to focus on expenses that you’re sure you will have in 2024 – they just haven’t come due yet. Also, make sure to have the cash flow available to cover the expenses, when doing so. You don’t want to go into debt simply to reduce a portion of your taxes.
Lean into charitable contributions
Charitable contributions have lost some value from a tax perspective because the standard deductions on your taxes increased in the 2018 Tax Cuts and Jobs Act. But if you have high real estate interest or state taxes, it’s entirely possible that you do itemize.
If so, then upping the charitable contributions will increase your itemized deductions, and you have until the end of the year to make it work.
You can give to charity in many ways, whether it’s in cash, property or even donating to a donor advised fund. But you must finalize the amount before the end of the year, or you will lose out on this option come tax time.
Depending on what you give and the organization you give to, you can deduct between 20% and 60% of your gross income. While few can expect to give that much, even $1000 can reduce the tax bill.
But only give what you comfortably can.
Open a retirement account
If you work for yourself, now is the time to open a retirement account.
You do not need to contribute to the account yet. But you need to have the account opened before the end of the year.
This gives you options. By opening a Solo 401k, for example, by December 31, come tax time you can work with your tax preparer to determine how much you can contribute for 2023 to reduce your taxes. Don’t have the cash flow to contribute for 2023? Well, it’s open and available for regular contributions for 2024.
But you only have the option to reduce your 2023 tax bill if the account is opened by the end of the year. And with a solo 401k, you can contribute a significant amount of money.
As an employee, you can contribute up to $22,500 for 2023. But as an employer, you can also potentially contribute an additional $43,500 (or 25% of earned income). If you’re over 50, you even have the option of catch-up contributions.
While most people won’t max out their solo 401k, there’s plenty of room to reduce your taxes by cutting your gross income in the form of retirement savings.
As you finish your holiday leftovers, tax time will come fast. Protecting the private practice or small business now can make for a wonderful New Year.