Fiducial Can Help You Start Off on the Right Foot for the 2023 Tax Year

• Learn about W-4 updates.
• Find out why collecting W-9s now will save you time later.
• Find dates for estimated tax payments in 2023.
• Learn about the bunching strategy for charitable contributions.
• Discover how required minimum distributions have changed in 2023.
• Find out how gifting can benefit you tax-wise.
• Can you afford to increase your retirement-plan contributions in 2023?
• Don’t forget to update your beneficiaries.
• Learn about reasonable compensation and the 20% pass-through deduction.
• Discover why you should start recording your business-vehicle mileage now.
• Learn why you should start contributing to your college tuition plans ASAP.

Individuals and small businesses should consider various ways of starting off on the right foot for the 2023 tax year. Fiducial can help!

W-4 Updates for the 2023 Tax Year

If you are employed, then your employer takes the information from your Internal Revenue Service (IRS) Form W-4 and applies it to the IRS’s withholding tables. This determines the amount of income tax to withhold from your wages in each payroll period.

If your 2022 refund or balance due turns out not to be the desired amount, you may want to consider adjusting your withholding based on your projected tax for 2023. Need assistance? Call your Fiducial representative.

W-9 Collection

If you are operating a business, then you are required to issue a Form 1099-NEC to each service provider to which you have paid at least $600 during a given year. It is a good practice to collect a completed W-9 form from every service provider before they begin work(even if you are paying less than $600) as you may use that provider again later in the year. You may have difficulty getting a W-9 after the fact—especially from service providers that do not plan to report all of their income for the year.

Dates for Estimated Tax Payments in the 2023 Tax Year

If you are self-employed, then you generally prepay each year’s taxes in quarterly estimated payments. You can do this by sending 1040-ES payment vouchers or making electronic payments. For the 2023 tax year, the first three payments are due on April 18, June 15, and September 15, 2023. The final payment is due on January 16, 2024. Generally, these payments are based on the prior year’s taxable income. If you expect any significant changes in either income or deductions relative to the previous year, contact your Fiducial representative for help in adjusting your payments accordingly.

Charitable Contributions

If you marginally itemize your deductions, then you can employ the bunching strategy. This involves taking the standard deduction one year but itemizing your deductions in the next. However, you must make this decision early in the year so that you can make two years’ worth of charitable contributions in the bunching year.

Required Minimum Distributions for the 2023 Tax Year

Each year, if you are 73 (a recent law change increased it from 72 in 2022) or older, you may have to take a required minimum distribution from each of your retirement accounts. If not, you face a substantial penalty. By taking this distribution early in the year, you can ensure that you do not forget and accidentally subject yourself to penalties.

Gifting

Looking to reduce your estate-tax exposure or just want to give some money to family members? Know that each year, you can gift up to an inflation-adjusted amount, which for 2023 is $17,000, to each of an unlimited number of beneficiaries without affecting your lifetime estate-tax exclusion amount or paying a gift tax.

Retirement-Plan Contributions in the 2023 Tax Year

Review your retirement-plan contributions to determine whether you can afford to increase your contribution amounts. You can also make sure you are taking full advantage of your employer’s matching contributions to the plan.

Beneficiaries

Marriages, divorces, births, deaths, and even family clashes all affect whom you include as a beneficiary. It is good practice to periodically review not just your will or trust but also your retirement plans, insurance policies, property holdings, and other investments to be sure that your beneficiary designations are up to date.

Reasonable Compensation

This has been a contentious issue for many years, especially for S corporations. Tax authorities will look to see if a shareholder has been paid a reasonable salary for services rendered to the S corporation and if distributions were taken. The tax authorities will challenge shareholders who are not just investors but who are actually working in the business if they take a minimum salary (or no salary at all) so that all of their income passed through the K-1 as investment income.

This “strategy” allows such shareholders and the S corporation to avoid payroll taxes on income that should be treated as W-2 compensation. Tax authorities have the statutory authority to reallocate any amount taken from the S corporation to compensation, subject to income and payroll taxes. A number of issues factor into a discussion of reasonable compensation, including comparisons to others working in similar businesses and to employees within the same business, as well as the cost of living in the business’s locale. This is a subjective amount, and it generally must be determined by a firm that specializes in making such determinations.

Business-Vehicle Mileage

Generally, vehicles with business use also have some amount of nondeductible personal use in a given year, such as commuting. It is always a good practice to record a vehicle’s mileage at the beginning and at the end of each year and record the business use of the vehicle contemporaneously (keep a log). If you use the "actual expense" method rather than the "cents-per-mile" method, the total mileage is used along with the business use miles to pro-rate auto expenses.

College-Tuition Plans

Contribute to your child’s Section 529 plan as soon as possible. The funds begin accumulating earnings as soon as they are in the account. This is important because the student will likely begin using that money at age 18 or 19.

Only a few of the tax-related actions that you take during a year will benefit yourself or others. The most important of these actions is keeping timely and accurate tax records; for businesses in particular, this is of the utmost importance. Those who have well-documented income and expense records generally come out on top when the IRS challenges them.

Have questions related to your taxes? Would you like an appointment for tax projections or tax planning? Call Fiducial at 1-866-FIDUCIAL or make an appointment at one of our office locations to discuss your situation.

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