The Internal Revenue Service began accepting tax returns for the year of 2023 on January 29th, officially marking the beginning of tax season. We all know what that means – hoping and wishing for the largest tax refund possible.
For high-income earners, trying to maximize their refund can be complicated. The IRS considers high-income earners those that earn $400,000 to $500,000 or more each year. 1 The key to maximizing your refund can be simple, though, if you keep in mind two things: decrease taxable income and increase deductions.
For starters, you should know that your wages minus deductions are equal to your taxable income. The IRS provides the option of itemized deductions or the standard deduction. In 2023, the standard deduction for single taxpayers was $13,850 and $27,000 for married couples filing jointly. However, if the total of your itemized deductions is more than these amounts, it may be recommended that you opt for itemized deductions instead. Continue reading below for a list of ways to reduce your taxable income or increase your deductions on your 2023 tax return, and for further assistance, consider consulting with a tax preparer or CPA.
Deductions
Mortgage Interest Tax Deduction – Interest paid on your mortgage payments can be deducted on your taxes and lower your overall taxable income. The Mortgage Interest Tax Deduction is limited to loans or mortgages up to $750,000 for married couples filing jointly, single filers and heads of households. Married taxpayers filing separately could deduct up to $375,000 each.2
529 Plans – 529 Savings Plans are savings plans for future education costs. While 529 Plans aren’t tax-deductible on federal taxes, 38 states offer tax deductions on contributions made to state-sponsored 529 plans.3 However, you must be a resident of that state to take advantage of the deduction. If you have children or grandchildren, you can utilize a 529 Plan to defer interests, dividends and gains and bring your taxable income down. So long as contributions to these accounts are used on qualifying expenses like tuition or textbooks, you will never have to pay taxes on withdrawals.
Qualified retirement plan contributions – Traditional IRA contributions – Contributions to your traditional IRA count as a deduction, so financial advisors may recommend maxing out contributions to this account if possible. In 2023, you could contribute $6,500 (or $7,500 if you were over the age of 50) into your traditional IRA. Contributions to a ROTH IRA are after tax, so these are not deductible on your tax return. The tax benefit for a ROTH comes when you take a distribution in retirement.4
Medical expenses – If you choose to itemize rather than opt for the standard deduction, you can also deduct dental and medical expenses for the year, in excess of 7.5% of your AGI. Deductible medical expenses include but aren’t limited to: money paid to doctors, surgeons, dentists, psychiatrists and more; inpatient hospital care or residential nursing home care; prescription medicine costs; inpatient expenses for drug or alcohol addiction; expenses paid for false teeth, prescription eyeglasses or contact lenses, and hearing aids. 5
Reduce Your Taxable Income
Municipal bonds – The SEC defines municipal bonds as debt securities issued by states, cities, counties, and other governmental entities to finance projects and day-to-day operations. Municipal bonds are similar to corporate bonds in that you receive regular interest payments until the bond matures, at which point you receive the full initial investment. What sets municipal bonds apart, however, is that the interest on municipal bonds is exempt from federal income tax, and oftentimes state and local taxes.6 Interest rates on municipal bonds are often lower than corporate bonds, given how tax advantageous they can be.
Health Savings Account or Flexible Savings Account – Flexible spending accounts (FSAs) and health savings accounts (HSAs) are both healthcare savings accounts that allow you to set money aside for medical expenses. Funds that go into an HSA or FSA are tax free. HSAs let you carry the money you put away over year after year, while an FSA’s funds are forfeited at the beginning of each year, with some exceptions that vary from employer to employer. Money in an HSA also compounds interest and grows over the year. Both FSAs and HSAs may only be used towards qualifying costs. 7
Investing in Qualified Dividends – Traditional dividends are taxed as ordinary income, maxing out at 37%, but if you invest in companies that pay out qualified dividends, you can bring this top tax rate percentage down to 20. Qualified dividends are tax-free until you earn more than $44,625 as a single filer.
Charitable Contributions – Donating to charitable institutions or programs is another great way to reduce your taxable income. The IRS allows you to deduct 60% of your AGI in cash contributions, and 30% of your AGI for non-cash contributions. 8
For a comprehensive review of your personal situation, always consult with a tax or legal advisor. Neither Cetera Advisor Networks LLC nor any of its representatives may give legal or tax advice. A Roth IRA offers tax-free withdrawals on taxable contributions. To qualify for the tax-free and penalty-free withdrawal of earnings, a Roth IRA must be in place for at least five tax years, and the distribution must take place after age 59 ½ or due to death, disability or a first-time home purchase (up to a $10,000 lifetime maximum. Depending on state law, Roth IRA distributions may be subject to state taxes. The information on Health Savings Accounts (HSAs) provided herein is general in nature. It is not intended, nor should it be construed, as legal or tax advice. Because the administration of an HAS is a taxpayer responsibility, you are strongly encouraged to consult your tax advisor before opening an HAS. You are also encouraged to review information available from the Internal Revenue Service (IRS) for taxpayers, which can be found on the IRS website at IRS.gov. Tou can find IRS Publication 969, Health Savings Accounts and Other Tax-Favored Health Plans, and IRS Publication 502, Medical and Dental Expenses, online, or you can call the IRS to request a copy of each at (800)829-3676. Investors should consider the investment objectives, risks, charges and expenses associated with municipal fund securities before investing. This information is found in the issuer’s official statement and should be read carefully before investing. Investors should also consider whether the investor’s or beneficiary’s home state offers any state tax or other benefits available only from that state’s 529 Plan. Any state-based benefit should be one of many appropriately weighted factors in making an investment decision. The investor should consult their financial or tax advisor before investing in any state’s 529 Plan.>
The opinions contained in this material are those of the author and not a recommendation or solicitation to buy or sell investment products. This information is from sources believed to be reputable, but Cetera Advisor Networks LLC cannot guarantee or represent that it is accurate or complete. All investing involves risk, including the possible loss of principal. There is no assurance that any investment strategy will be successful. Investors should also consider whether the investor’s or beneficiary’s home state offers any state tax or other benefits available only from that state’s 529 Plan. Any state-based benefits should be one of many appropriately weighted factors in making an investment decision. The investor should consult their financial or tax advisor before investment in any state’s 529 Plan.
Some IRAs have contribution limitations and tax consequences for early withdrawals. For complete details, consult your tax advisor or attorney.
