Strategies to Get the Most Out of Your Tax Return

You might think that once you file your 2022 tax return, you are finished and done with it. But on the contrary, we believe that your 2022 tax return contains plenty of information that could be of assistance with your tax planning in 2023 and beyond. Here are some specific areas of your previous year’s tax return that you might wish to review with your wealth advisor before you file it away forever.

Make sure that all planning items were captured

Documents such as a W-2, 1099 or Social Security income statement are relatively easy to capture on your tax return, but some other items may not be so simple.

For example, 529 contributions may not generate an official IRS tax form. Or you may get documents after the filing deadline, such as Form 5498 regarding your IRA contributions. Or you may receive something that is potentially misleading, such as Form 1099-R pertaining to retirement plan withdrawals after you have executed a qualified charitable distribution.

The key takeaway is to review all of your tax planning activity from the previous year, including IRA contributions, charitable contributions, qualified charitable distributions, 529 plan contributions and state-level real estate tax credits, to make sure that everything was captured correctly. In our experience, catching something that is either missing or misreported could save you money.

Review your income tax bracket

You can figure your income tax bracket out by looking at the taxable income you reported last year and comparing it to the IRS tax bracket chart. This might help you spot opportunities for the year ahead. Here are two things we suggest looking out for:

1. If you are crossing over into a higher tax bracket, it might be worth looking for ways to either defer income or accelerate deductions this year in order to remain in a lower tax bracket.
2. Conversely, if you have lots of space before reaching the next tax bracket, you might decide that now is a good time to use it up, say by performing a Roth conversion. Just keep in mind that generating more ordinary income in this manner could increase the tax rate applied to other sources of income, such as qualified dividends and capital gains.

Knowing what tax bracket you were in last year can give you insight into how things may be different this year and which strategies you might want to investigate to reduce or accelerate your income.

Watch out for extra taxes

Just like the income tax brackets themselves, the amount of tax you pay is often triggered when you cross certain thresholds. We suggest being mindful of the extra taxes you might be triggering.

For example, the Net Investment Income Tax of 3.8% starts to apply to net investment income from things like interest, dividends and capital gains when you have Adjusted Gross Income (AGI) of $200K for single filers and $250K for couples filing jointly. This extra tax may influence you to reduce the amount of your AGI in a given year if you are able.¹

Another instance is the Medicare income brackets that determine your future premiums. Depending on your income, you might decide to look for strategies to move down a bracket to save on premiums.²

Just because last year’s tax return is complete does not mean there is no more use for it. By reviewing it with your wealth advisor and tax professional, last year’s return can be a great starting point for this year’s tax planning.

¹ https://www.irs.gov/individuals/net-investment-income-tax
² https://www.medicare.gov/Pubs/pdf/11579-medicare-costs.pdf

ABOUT THE AUTHOR