3 Tax Savings Opportunities In 2023
Here are the top three tax savings opportunities that you may be overlooking:
1) Contributing to a retirement account.
Putting money into a retirement account, like a 401(k) or an IRA, can lower your taxable income and possibly lower the amount of taxes you owe. In 2023, these limits increased significantly. Make sure you adjust your contributions accordingly!
2) Taking the home office deduction.
If you are self-employed and work from your primary residence, you may be able to claim a home office deduction for a portion of your home expenses, such as utilities and mortgage interest.
3) Making charitable donations.
Donating to charitable organizations can also result in tax savings, as charitable donations are tax-deductible. In Arizona, donating to qualified, local charities are a dollar-for-dollar tax credit up to certain limits!
More about charitable donations...
Many times, the benefits of charitable giving are misunderstood. Not only does charitable giving create value for others in the world, it can many times have a positive impact on our own tax situation. There are several ways to make charitable donations, and the best option for you will depend on your personal circumstances and goals. I’ll detail the list below:
Volunteer your time: Many charities rely on volunteers to help carry out their missions. Consider donating your time and skills to a cause you care about.
Make a cash donation: This is the most straightforward way to make a charitable donation. You can write a check, donate online, or give cash directly to the charity. You can take a deduction for your donations on anything you give if you are itemizing deductions. In Arizona, dollar-for-dollar tax credits are a great way to receive a tax benefit for charitable donations if you take the standard deduction.
Donate property: In addition to cash, you can donate property (i.e. clothes, other household items, etc. to organizations like Goodwill). However, what many people miss is the ability to donate stocks, real estate, or other appreciating assets.
When you donate appreciated assets to a charitable organization, you may be able to claim a tax deduction for the full market value of the asset at the time of the donation. This can be a tax-efficient way to make a charitable donation, as you can avoid paying capital gains tax on the growth of that asset. To claim a tax deduction for a charitable donation of appreciated assets, you must have held them for more than one year, and the charitable organization must be a qualified organization.
For example - Let’s say you have a stock that has appreciated significantly and represents more of your portfolio than what you want. Likely, you will hesitate to sell it because of tax implications. Alternatively, you can donate shares of that stock and avoid the capital gains tax! This is especially powerful if you were going to make a cash donation to the same organization anyway because you can invest the cash you would have given. This gives you the ability to rebalance your portfolio and save on the capital gains tax you would’ve otherwise paid on the sale of those shares of stock.
Set up a charitable giving plan: If you regularly itemize deductions and give charitably, you should consider utilizing a donor-advised fund.
A donor-advised fund (DAF) is a charitable giving vehicle that allows you to make a charitable contribution and receive an immediate tax deduction. Subsequently, you’re able to recommend grants to charitable organizations at a later date. DAFs can be a good opportunity to give in a number of circumstances:
If you want to make a charitable contribution but are not sure which specific organization to support, a DAF allows you to make a donation and take your time to research and recommend grants to charities at a later date.
A DAF can help you simplify your charitable giving by allowing you to make all of your charitable contributions through one account.
Sometimes we have the ability to make large charitable contributions after windfall events. A DAF can be a good option if you want to make a significant charitable contribution and receive a tax deduction immediately, but spread the donations out over multiple tax years. This can make your giving go much further by potentially reducing taxes even more in the year that the windfall was received.
If you want to involve your family in charitable giving, a DAF can be a powerful way to introduce them to the charitable giving process and teach them about philanthropic habits. You will have the ability to make decisions as a family on how much you wish to give, and the organizations that you want to give to.
It's a good idea to consult with a financial or tax professional to determine if a DAF is the right charitable giving option for you. The amount of charitable deductions you can claim in any given tax year is limited. No matter how you choose to give, you should research the charity to make sure that your money will be used in a way that fits with your values. My favorite tool to use to research charities and organizations is Charity Navigator. This website allows you to see the impact the organization is making with the money that it receives.
If you have questions on any of these topics, or would like to talk about how you are invested, schedule a time to chat with us at Redeem Wealth. We’d love to make sure you are set up for success as an investor, and taking the steps that matter most in reaching your goals.
