Tax-Saving Tips for Your 2023 Return and the New Tax Year

It’s easy to take advantage of tax adjustments that can help maximize your refund (or at least lower what you owe) for 2023. Follow these guidelines for tips to save money on taxes and to help you navigate this tax season.

Let’s Begin

Mark your calendar to get a sense of the timeline ahead for your 2023 return. This year, all state and federal tax returns and payments are due Monday, April 15. Don’t wait. Even if paperwork, such as a W-2 from an employer, has not arrived yet, it’s smart to research the tax credits and deductions you may qualify for. Many are mentioned below.

One of the biggest choices at the outset of tax prep is whether to take the standard deduction or itemize your deductions.

• Standard deduction. Generally, taking the standard deduction is considered the easier route, but you could be leaving savings behind. For tax year 2023, the IRS raised the standard deduction to adjust for inflation. For most singles, it’s $13,850. For most married couples filing jointly, it’s $27,000.
• Itemizing deductions. This is likely worth pursuing when your qualified expenses add up to more than the standard deduction. Run a cursory calculation to gauge if itemizing could lower your tax bill, especially if you are self-employed, live in an area with high taxes or own a home. As in recent years, there is no limit on itemized deductions for the 2023 tax year.

Smart Actions

Follow these tips as you work through your 2023 taxes.

• Make a contribution

  You can still make contributions to certain accounts in 2024 to help lower your 2023 taxes. Until tax day, you can contribute to an individual retirement account (IRA) or health savings account (HSA) to lower your 2023 taxable income.

  • Retirement Contributions

    IRA contributions are limited to $6,500 — or, if you are 50 or older, $7,500.

    It’s important to note that any Roth IRA withdrawals you make this year will be tax free, in most cases. Some penalties may apply, so it’s always a smart idea to check the IRS website to gain clarity on your specific circumstances.

    Remember that 401(k) contributions made during a calendar year are deductible — up to $22,500. If you’re 50 or older, the catch-up contribution is $7,500.

  • Health Savings Contributions

    HSA accounts, with high-deductible health plans, can be funded up to $3,850 for an individual policy or $7,750 for a family policy. Any interest earned is tax free.

  Note that contributions made by or through an employer have already been deducted from your taxable income, so no additional steps are required on your return. Contributions to a flexible savings account, or FSA, through an employer have also been deducted from your taxable income.

• Look above the line

  See if you qualify for “above-the-line deductions.” These can be claimed even if you claim the standard deduction and reduce income tax by lessening your overall gross income. (IRA and HSA contributions are examples.)

  When filing a standard tax return with Form 1040, look for these deductions above “adjusted gross income,” or AGI.

  One above-the-line deduction that will be top of mind for many this year is student loan interest (up to $2,500 for 2023). After a three-year pause due to the pandemic, federal student loans resumed accruing interest in September, with payments resuming in October.

  Whichever deductions you decide to claim, just remember that you may be required to fill out additional tax forms.

• Deduct donations

  For the 2023 tax year, the only way to claim a deduction for charitable contributions is to itemize your taxes.

  Charitable contributions of up to 60% of your AGI can be deducted, if made to qualifying organizations. Most cash contributions qualify. Any out-of-pocket expenses that you incur when volunteering for a qualifying charity can be deducted — for example, the amount spent on groceries to make a dessert for a fundraiser. Remember to keep receipts in case of an audit.

• Take credit(s)

  Tax credits allow you to directly subtract dollar amounts from the income taxes you owe. Thus, tax credits can make a significant difference in your bottom line. One example is the Child Tax Credit, through which you can receive a credit of up to $2,000 per qualifying child.

  Credits come in two categories — refundable or nonrefundable. If the credits you claim are refundable and add up to an amount greater than your tax bill, the difference is refunded to you. If nonrefundable credits amount to more than what you owe, your refund is zeroed out.

• Medical deductions

  Deducting medical expenses while itemizing can significantly reduce your taxable income — but make sure you qualify.

  Out-of-pocket medical expenses must exceed 7.5% of your AGI to be deducted. These could include prescription drug and eyewear costs and most medical payments. You may be able to deduct your premium costs entirely if you’re self-employed and managing your own health insurance coverage.

• Save on state or sales taxes

  If itemizing your deductions, compare the amount you paid in sales tax in 2023 with your cumulative taxation by state and local governments. You can deduct the larger of the two amounts from your federal income taxes.

  Those claiming the sales tax break should make sure to have the receipts for especially large purchases (such as an appliance or car), in case of an audit. The IRS also offers a worksheet to calculate sales tax estimates.

Lessen Your Liability

If you or your family experienced significant life events during the 2023 tax year, you may catch a break from the IRS.

• Getting married. Filing jointly with a spouse typically lowers your taxes. In some situations, filing jointly may increase what you owe, so it’s wise to calculate your tax bill both ways.
• Family additions. Welcoming children to your household can lower your federal tax liability significantly through credits. Common ones, such as the Child Tax Credit and the Earned Income Tax Credit, can wipe thousands of dollars off your bill.
• Income changes. You may have joined a different tax bracket, so check your 2023 income against the latest tax tables, which also can change from year to year.
• Buying or selling a home. Itemized deductions are allowed for real estate taxes, mortgage interest and other aspects related to selling and buying homes. On the seller side, you can avoid paying taxes on gains of up to $500,000 if you file jointly.
  
• Retirement savings and distributions. Remember, 401(k) and IRA contributions are tax deductible, but most distributions from these accounts are taxed. 
  
• Inheritance. Most forms of inheritance are tax free at the federal level. However, distributions from retirement accounts are likely to be taxed, as are gains on sales of property and other types of inherited assets. 

Information Pays Off

It never hurts to be informed, especially when it comes to your finances. But there’s no replacement for consulting a tax professional if you’re aiming to maximize savings when filing your 2023 return. At tax time, or at any time, the KeyBank team stands ready to assist you for all your financial needs.

Want even more tax-saving tips? Check out part two of this series.