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With tax season right around the corner, this is the time of year that many business owners are thinking about taxes.
Do you want to reduce your taxes? Of course you do.
One way of doing this is implementing tax deferral strategies. But what does that even mean?
Tax deferral means taking a deduction and moving it into an earlier year or deferring some income to a later year. You are not really reducing your overall taxes, but you are getting a benefit up front. If you do these tax deferral strategies year after year and pay less in taxes up front, you can utilize the time value of money. This means that your dollars are more valuable today than in the future because they can be invested to earn interest, yielding more than a dollar in the future.
Below are the top tax deferral strategies you should consider taking advantage of!
As a business owner, you can make two separate contributions to retirement plans.
As an individual, you can contribute up to $6,500 in 2023 to a traditional IRA. This is a personal contribution separate from your business.
Additionally, you can also contribute to a SEP IRA or 401(k) from your business. You can generally contribute up to 20% of your business net profits (or 25% of your W-2 if you are an S-Corp) to a SEP IRA up to the limit of $66,000 in 2023. This contribution comes from the business and is a business deduction.
Or if your business has a 401(k) you can elect to contribute up to $22,500 of your pay to the 401(k) in 2023. Your business may also match a portion of your contribution depending on how your 401(k) plan is set up.
These SEP IRA and 401(k) contributions decrease your taxable income by the amount you contribute to the retirement plan!
This is a popular tax deferral strategy for business owners. In December, look at your financial results for the year (this is why bookkeeping is so important!). If you’re having a successful year, pull your upcoming January & February expenses into the current year and pre-pay them. Maybe you have a big retreat you are planning or are considering joining a mastermind? Pre-pay those expenses in December.
The other part of this is to try to push as much December income as possible into January. Don’t send out your invoices in the middle of December, wait until January so the money comes in later. That way, you can defer the income and accelerate the expenses.
If you have a high deductible health insurance plan, HSAs are triple tax-advantaged accounts: Contributions are tax-deductible, the money grows tax-free, and withdrawals are tax-free for qualified medical expenses for those under age 65, and for any purpose if you are age 65 or over. The contribution limits for 2023 are $3,850 for individuals and $7,750 for families. If you are age 55 or over, you can contribute an extra $1,000.
Do you have kiddos that you are saving money for education? A 529 Plan may be a great option for you. You pay federal taxes on your contributions, but the money grows tax-free and distributions for qualifying educational expenses are not taxed. There are no annual contribution limits, but starting in 2022 contributions above $16,000 per donor per beneficiary count against the lifetime estate and gift tax exemption. The contributions are also deductible for state income tax purposes in many states. Money in these accounts can be used to cover any education expenses for college or even private school tuition of up to $10,000 per year.
These strategies can yeild significant tax savings! If you have questions, be sure to reach out to NewWay Accounting for more information!
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