How to Save Yourself Money by Lowering Your 2023 Taxes

Most tax-related activity had to be completed by year-end to affect taxable income for 2023. However, there are a few ways individuals can still reduce their taxable income for last year. And these tax deductions are allowed whether you use standard or itemized deductions. Commonly called “above the line” deductions, these are captured on your IRS Form 1040 Schedule 1 as Adjustments to Income, and they must be made by the tax filing deadline on April 15, 2024.

There’s still time to make a $6,500¹ ($7,500 if age 50 or older) contribution to your IRA for the 2023 year. You may be able to deduct some or all of the amount of the contribution depending on your income level and if you (or your spouse) are covered by a retirement plan at work.

Generally, you must have earned income to contribute to an IRA. However, if your spouse doesn’t earn income or has very little compensation, they can fund their own IRA up to the contribution limit based on your compensation if you file a joint income tax return. While your combined IRA contributions can’t exceed your combined income, you could possibly double up the amount of your deduction depending on the limits outlined in the previous table (see Tax Year 2023 Income Limits for Traditional IRA Deductibility).

Small business owners and self-employed individuals may use a simplified employee pension (SEP) plan to save for retirement. Each eligible employee, including the business owner, has an individual SEP-IRA under the plan that is funded solely by the employer. The contribution limits are quite generous at 25% of compensation (up to $66,000) for tax year 2023. The contribution amount is tax-deductible for the employer. Contributions may be made by the due date (including extensions) of the business’s income tax return for that year.

If you participated in a high-deductible health plan (HDHP), you can contribute $3,850 for individual or $7,750 for family coverage (an additional $1,000 for those 55 and older) for tax year 2023 to a health savings account (HSA). Many people use HSAs to cover immediate, out-of-pocket health care costs. But HSAs are also a good way to invest for the long term—tax-free—to offset future health expenses in retirement. Your contribution amount is generally fully tax-deductible and is recorded on IRS Form 8889 (Health Savings Accounts (HSAs)).

Certain households making contributions to an IRA or a workplace retirement plan may also benefit from a tax credit called a Saver’s Credit. If your adjusted gross income is $36,500 or less ($73,000 or less if married filing jointly), you could receive a tax credit up to $1,000 ($2,000 if married filing jointly). While $1,000 to $2,000 may not seem like a large sum, a tax credit reduces your tax liability dollar for dollar. This credit, however, will not result in a tax refund if your tax liability is less than zero. If you fall into these thresholds, you may want to spend a little extra time to complete IRS Form 8880 (Credit for Qualified Retirement Savings Contributions).

If you haven’t taken full advantage of your 2023 tax deductions, now’s the time to act. Determine what type of contributions you’re eligible for, along with what works best for your overall financial plan. Saving as much as you can now may provide a tax break today, but it could also grant you valuable time to allow your investments to grow for the future.