How To Lower Your Tax Bill Next Year

Knowing how to lower your next tax bill requires understanding your tax situation. Several factors contribute to your overall tax liability, including (but not limited to) a change in income and aging dependents. And receiving a tax refund last tax season doesn’t guarantee that you will receive one next year when the next tax season comes around. 

Staying up to date on new tax changes as 2023 progresses can help you understand how to pay less in taxes on your 2023 income than you need to. Here are some tips.

Lower your tax bill with deductions and credits 

Tax deductions, tax credits, and exemptions can potentially lower your tax liability and help you avoid a big tax bill (or get a bigger refund). Keeping detailed records throughout the year can also help keep you from missing out on those money-saving deductions and credits when you file your tax return next year. 

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This is especially important for self-employed taxpayers who write off business expenses.  Some common expenses self-employed workers can deduct include printers, office supplies, and laptops. Many can also write off a portion of their home’s expenses relative to their home office with the home office deduction. 

But don't just estimate your expenses. One study found that self-employed workers overpaid an average of over $3,000 in taxes. That's mainly because some people guess at expenses only to find that their actual expenses are higher.

You will need all of your receipts when using the “actual expense” method to calculate your home office tax deduction. You can multiply your home’s expenses by the percentage of your house devoted to your home office. The “simplified method” is based on the square footage of your office relative to your home, and you won’t need receipts. However, you’ll lose out on deducting other home costs as business expenses, so you could pay a lot more in taxes when using the simplified method.

W-2 workers (employees who have Medicare, Social Security, or income tax withheld from pay) can benefit from keeping detailed receipts as well. Some examples of expenses that can be deducted include:

• Energy-efficient home upgrades (energy-efficient windows, home energy audits, solar panels, etc.)  
• Some college expenses (excludes room and board, transportation, sports and hobbies, non-credit courses, insurance, and medical, personal, living, or family expenses.) 
• Childcare expenses (nanny, babysitter, daycare costs)
• Charitable donations (if you itemize deductions)
• Medical expenses (if you use your Health Savings Account (HSA) or Flexible Spending Account (FSA) to pay them)

Having organized receipts will tell you exactly how much you spent, but being able to document your expenses can also protect you if the IRS chooses your return for a tax audit. 

More: Tax Credits for Energy-Efficient Home Improvements

Consider life changes and your tax liability

Life changes can drastically impact your tax liability, sometimes without you even realizing it. While the following list does not cover all situations that can impact your taxes, you might see a bigger tax bill if any of these apply to you in 2023. 

• Collecting retirement benefits while continuing to work: Social Security retirement benefits are subject to federal income tax, and some states tax retirement benefits
• Age of dependents: Dependents turning 17 years old in 2023 will not qualify for the child tax credit. 
•  Work status of dependents: If your dependent is not a qualifying child (for example, a domestic partner) and exceeds the income threshold, you cannot claim them as a dependent. (For the 2022 tax year, a non-child dependent had to make under $4,400 in gross taxable income to qualify as a dependent. ) 

You can use the IRS’s Interactive Tax Assistant to find out who you can claim as a dependent on your 2023 tax return.

Pay estimated taxes (if you need to) 

The IRS reminds taxpayers to make estimated tax payments if they expect to owe more than $1,000 in federal taxes (after accounting for deductions and credits). Employees can opt to have more taxes withheld from their paychecks.

If you do not have taxes withheld throughout the year, you’ll likely need to pay estimated taxes each quarter. If you don’t, the IRS could penalize you, increasing your tax bill further. When you miss an estimated quarterly tax payment deadline, the penalty is 0.5% of your unpaid taxes for every month (or partial month) the payment is late. 

More: When are Estimated Tax Payments Due in 2023?

Check retirement contributions 

You can also lower your 2023 tax bill by taking advantage of retirement contributions. You can contribute a portion of your income tax-free (until you make withdrawals). 

Retirement savings plan contribution limits for 2023 are up $2,000 from 2022 to $22,500 (for traditional 401(k), 4103(b), and the federal government’s Thrift Savings Plan. Not counting that money toward your taxable income means the IRS will take less in taxes. Remember that the 401(k) contribution deadline is December 31.

However, you can expect to pay even more if you make early retirement withdrawals (before age 59 ½ ). The money you withdraw will be counted in your taxable income, but you might also face an additional tax penalty of 10%.  

Review tax changes for 2023

Casual online sellers won't likely see a 1099-K in 2023 just because they receive payments for goods and services through third-party payment platforms like PayPal and Venmo. That's because the IRS is delaying the $600 1099-K reporting rule this year. 

Remember though, that the IRS requires you to report all your taxable income regardless of whether or not you receive a 1099-K. So, the 2023 threshold for issuing the 1IRS 099-K form will stay at $20,000/200 transactions, as it was in 2022. 

2023 federal income tax brackets 

Not all 2023 tax changes will cost you more money. In fact, you might see your 2023 tax bill reduced without any effort. The federal income tax brackets are increased yearly to account for inflation. 

This is good news if you didn’t get a raise at your job, but even if you did, the tax bracket adjustment might help you avoid having to pay a higher percentage of taxes on that income.  

Check your tax withholdings 

The IRS reminds taxpayers to reassess their tax withholdings for the 2023 tax year, regardless of their tax liability the previous year. (Sometimes, even minor changes can have an impact on your tax bill).  

• Qualification for the Earned Income Tax Credit (EITC): An increase in income or change in the number of dependent children can reduce the amount of the credit you qualify for. 
• Placement in a higher tax bracket: An increase in your income could push you into a higher federal income tax bracket, (sometimes called "bracket creep," which means you might pay a higher tax rate on some of your earnings. 

You can use the IRS’s Tax Withholding Estimator to help you determine if you should adjust your withholdings for 2023. Although withholding changes made too late in the year might not impact your tax bill.

Related Content

• Tax Changes and Key Amounts for 2023
• What are the Income Tax Brackets for 2023?
• IRS Form 1099-K Reporting Changes: Everything You Need To Know