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2023 Tax Planning - Benefits of Lowering Adjusted Gross Income

December 15, 2023



Starting in 2023 to 2024, individual taxpayers may be able to reduce their taxable income through deductions if they meet the qualifications and income limitations. Saving for retirement and for future medical costs is an important way for an individual to achieve financial security and prepare to save for future expenses. We focus on the background and tax benefits on reducing adjusted gross income by contributing to retirement plans, contributing to a health savings account, and opportunities for a student loan interest deduction.

 

Traditional IRA.

Any individual, regardless of whether covered under other qualified retirement plans, can establish an individual retirement account (IRA). Whether an individual is employed or self-employed, they may also take advantage of a variety of employer-sponsored retirement plans. These options not only provide security for the future, but also may provide opportunities for current tax savings. Traditional IRAs allow an individual with earned income to make tax-deductible contributions to a savings plan under which the gains and earnings are not taxed until they are distributed.

 

Contributions to a traditional IRA are deductible on the taxpayer’s individual income tax return, to the extent that they do not exceed the lesser of the individual's compensation for the year or the maximum contribution limit for the year and subject to income limits. In addition, nondeductible contributions from after-tax income may be made to traditional IRAs. For 2023, the maximum contribution limit to traditional and Roth IRAs for all taxpayers is $6,500 or $7,500 if age 50 or older. For 2024, the maximum contribution limits $7,000 or $8,000 if age 50 or older. The prior maximum age limitation of 70-½ to contribute to an IRA ended effective for contributions after December 31, 2019, there is no age limit on making regular contributions to traditional and Roth IRAs.

 

SEP Plan.

A SEP is a type of IRA for small business owners or self-employed individuals. A SEP IRA allows the employer to make contributions to the accounts set up for employees. Self-employed individuals choosing a SEP must include all employees who satisfy the following requirements: at least 21 years of age; were employed during any three of the preceding five years; and earned at least $750 in the current year. In 2023, those using a SEP IRA can contribute as much as $66,000, or up to 25 percent of their business earnings or compensation, whichever is less.

 

Contributions to a SEP plan are tax-deductible and earnings are not taxable until withdrawal. One advantage of the SEP IRA is the higher contribution limit. Employers can contribute lesser of up to 25% of income (limited to $330,000 in 2023, $345,000 in 2024) or $66,000 for 2023 and $68,000 for 2024.

 

SIMPLE Plan. 

Any employer that had no more than the 100-employees with $5,000 or more in compensation during the preceding calendar year can establish a SIMPLE IRA plan. Self-employed individuals who received earned income from the taxpayer and leased employees are taken into consideration for purposes of the 100-employee limitation.

 

Employers must also make contributions whether an employee elects to defer a portion of their income to the plan. Contributions are tax deductible and investments grow tax deferred until the owner is ready to make withdrawals in retirement. An employee may defer up to $15,500 for 2023, and $16,000 for 2024. If the individual age 50 or over, there is a $3,500 catch up contribution allowed, for a total of $19,000 for 2023, and $19,500 for 2024.

 

Health Savings Account (HSA).

Health savings accounts (HSAs) are available for individuals who have a high deductible health plan and may be funded by the individual or the individual’s employer. The benefits of an HSA include:

  • Taxpayers can claim a tax deduction for contributions you or someone other than your employer make to your HSA,

  • Contributions to your HSA made by your employer may be excludable from income, and

  • The contributions remain in your account until you use them.

Maximum contribution to an HSA is the lesser of the annual deductible under the individual's high deductible health plan; $3,850 for 2023, $4,150 for 2024 for an individual with self-only coverage and $7,750 for 2023, $8,300 for 2024 for an individual with family coverage.

 

Student loan interest deduction. 

Interest paid by an individual taxpayer during the tax year on any qualified education loan is deductible from gross income in calculating adjusted gross income. The taxpayer must incur the student loan solely to pay qualified higher education expenses. The maximum deductible amount of interest is $2,500, but the deduction is phased out or reduced based on the taxpayer’s modified adjusted gross income.

 

The IRA contribution for 2023 is due until April 15, 2024, therefore please consult a financial advisor if you need it for future asset formation or saving measures for 2023.


Income and Contribution limits table of Roth IRA, Traditional IRA, SEP IRA and Health Saving Account. 

Roth IRA



Traditional IRA



SEP IRA and Health Saving Account


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