As we put the most recent tax season in our rearview mirror, I always like to take stock of the observations and opportunities gleaned from preparing tax returns for our clients. In the midst of the annual labyrinth of W-2s and 1099s, key takeaways can serve as valuable guideposts for financial planning in the coming months — including for 2023 tax changes.

Withholding

Getting annual withholding right is an underappreciated tax planning nuance. When you under-withhold, the consequence is receiving a tax bill you may not have been expecting. When you over-withhold, it represents an interest-free loan to the Internal Revenue Service (IRS). While receiving a large refund may offer momentary gratification, adjusting your withholding can create more free cash flow throughout the year, offering greater control and flexibility to plan for your financial goals.

Making the most out of refunds

Speaking of refunds, if you do receive one, consider it an opportunity to bolster your long-term savings and investment opportunities. These can include a Roth IRA or Health Savings Account (HSA). Importantly, you need to make the contribution before the deadline, but you can do so after filing your tax return.

So: File, receive the refund, then make the contribution. That’s a strategy to use “found money” for your prior-year contributions.

HSA ≠ FSA

Too often, folks treat HSAs similarly to Flexible Spending Accounts (FSAs) for healthcare. That is, they put money in but withdraw it in the same year to pay for healthcare costs. Remember, an HSA isn’t a “use it or lose it” pre-tax spending vehicle like an FSA. Rather, it’s a long-term savings instrument with numerous advantages. Fund your HSA, invest it, let it grow, and use it later. Your future self will thank you.

Pro tip: One way to keep their uses in mind is by remembering (or Google-ing!) what the “S” in the middle of each acronym stands for. Spend the dollars in your Flexible Spending Account while you save the dollars in your Health Savings Account.

Depreciation isn’t optional

One significant takeaway from this tax season pertains to rental property owners. In short: Depreciation on your rental property isn’t optional. Regardless of whether you claim it while renting out your place, you must treat a portion of your gain as depreciation that was allowed -OR- allowable when you sell the property.

Without claiming depreciation on the building while renting it, you not only lose out on a deduction, but you’re also still on the hook for paying a higher capital gain tax rate at the sale. If you’ve missed this boat, there is a rescue available, but it will definitely require the involvement of a knowledgeable tax professional to correct it.

Max it out

In terms of retirement planning, I can’t stress enough the importance of funding employer-sponsored retirement plans like 401(k)s, especially for those in their higher-earning years (hello, generation X!). Tax-efficient savings now can not only open up myriad planning opportunities for your retirement but also give you increased savings capacity today through the efficiency of lowering your current tax cost.

Review prior years

One of my favorite cases last tax season was the discovery of a large prior-year disallowed passive loss that was abandoned on a (three years) earlier prior-year return. Without reviewing several years of prior returns, this loss — and the resulting $20,000 in tax savings — would have been lost forever. Ensure you continue to carry forward any prior-year passive losses that were disallowed due to passive activity loss rules and the like.

Roth conversions

The value of Roth conversion opportunities was also clear last year, especially in cases where income — and the related tax cost — was expected to be low. In some cases, Roth conversions were literally tax-free, giving those dollars the elite status of never-taxed. The window for that possibility is rare and fleeting. Tax planning will help make sure that you don’t miss out.

Be a control freak

If you’re able to control your income through distributions from certain investment accounts, use this capability efficiently. It can assist with everything from tax costs to health insurance expenses and much more. This is the nexus between cash-flow planning and tax planning — and it can quite literally change your life and give your retirement plan a big boost.

Planning for the future

As we look ahead to 2023 tax changes, two key pieces of legislation present new and valuable tax planning opportunities in 2023 and beyond.

1. The Inflation Reduction Act incentivized certain spending. It …

• improved tax credits for energy-efficient home improvements,
• refreshed tax credits for energy production (think solar, wind, geothermal), as well as
• adjusted and expanded tax credits for electric and plug-in hybrid vehicles.

2. The SECURE 2.0 Act presents some intriguing retirement planning opportunities.

• If you turn 72 this year, your Required Minimum Distribution (RMD) won’t kick in until next year …
  • … but your ability to make Qualified Charitable Distributions (QCDs) is still a thing.
• You can also now roll over 529 Plan balances to Roth IRAs, albeit with certain rules and limitations.
• The RMD excise tax, often seen as draconian, has been moderated and can now be as low as 10% with the right remediation measures.
• A big one: Roth contributions can now be made to SEP and SIMPLE IRAs.

There is a myriad of planning and strategies to explore and utilize as we leave one tax season behind and prepare for the next. Whether it’s getting withholding right, properly utilizing an HSA, making the most from the tax efficiency of rental property, or taking advantage of new tax laws, the key is to stay engaged and proactive in your 2023 tax planning.

A tax return may be a mandatory formality or — if you’re going it alone — a dreaded annual task. But it’s also an opportunity to review the past and plan for the future. With the right mindset and good professional advice, it can be a potent tool for financial growth and security.