How to Make the Tax Code Work for You

Presented by Marc Aarons

By May 20, 2022, over 145 million taxpayers had dutifully filed their federal income tax returns. And they all made decisions about deductions and credits – whether or not they realized it.¹

When you take the time to learn more about how it works, you may be able to put the tax code to work for you. A good place to start is with two important tax concepts: credits and deductions.

Keep in mind that the information in this material is not intended as tax or legal advice. It may not be used for the purpose of avoiding any federal tax penalties. Please consult legal or tax professionals for specific information regarding your individual situation.

Credits

As tax credits are usually subtracted, dollar for dollar, from the actual tax liability, they potentially have greater leverage in reducing your tax burden than deductions. Tax credits typically have phase-out limits, so consider consulting a legal or tax professional for specific information regarding your individual situation.

Here are a few tax credits that you may be eligible for:

• The Child Tax Credit is a federal tax credit for families with dependent children under age 17. The maximum credit is $2,000 per qualifying child, depending on your income level.²
• The American Opportunity Credit provides a tax credit of up to $2,500 per eligible student for tuition costs for four years of post-high-school education.³
• Those who have to pay someone to care for a child (under 13) or other dependent may be able to claim a tax credit for those qualifying expenses. The Child and Dependent Care Credit provides up to $4,000 for one qualifying individual or up to $8,000 for two or more qualifying individuals.⁴

Deductions

Deductions are subtracted from your income before your taxes are calculated, and thus, may reduce the amount of money on which you are taxed, and by extension, your eventual tax liability. Like tax credits, deductions typically have phase-out limits, so consider consulting a legal or tax professional for specific information regarding your individual situation.

Here are a few examples of deductions.

• Under certain limitations, contributions made to qualifying charitable organizations are deductible. In addition to cash contributions, you can potentially deduct the fair market value of any property you donate. And you may be able to write off out-of-pocket costs incurred while doing work for a charity.⁵
• If certain qualifications are met, you may be able to deduct the mortgage interest you pay on a loan secured for your primary or secondary residence.⁶
• Amounts set aside for retirement through a qualified retirement plan, such as an Individual Retirement Account, may be deducted. The contribution limit is $6,500, and if you are age 50 or older, the limit is $7,500.⁷
• In most circumstances, once you reach age 73, you must begin taking required minimum distributions from a Traditional Individual Retirement Account (IRA) or qualified retirement plan. Withdrawals are taxed as ordinary income and, if taken before age 59½, may be subject to a 10% federal income tax penalty.
• You may be able to deduct the amount of your medical and dental expenses that exceed 7.5% percent of your adjusted gross income.⁸

Understanding credits and deductions is a critical building block to making the tax code work for you. But remember, the information in this article is not intended as tax or legal advice. And it may not be used for the purpose of avoiding any federal tax penalties.

Marc Aarons may be reached at 714-887-8000 or marc@ocmoneymanagers.com

www.ocmoneymanagers.com

MMI Disclosure: The content is developed from sources believed to be providing accurate information. The information in this material is not intended as tax or legal advice. It may not be used for the purpose of avoiding any federal tax penalties. Please consult legal or tax professionals for specific information regarding your individual situation. This material was developed and produced by FMG Suite to provide information on a topic that may be of interest. FMG Suite is not affiliated with the named broker-dealer, state- or SEC-registered investment advisory firm. The opinions expressed and material provided are for general information, and should not be considered a solicitation for the purchase or sale of any security. Copyright FMG Suite.

1. <sup>IRS.gov, 2022
   2. Investopedia.com, June 24, 2022
   3. IRS.gov, 2023
   4. IRS.gov, 2023
   5. Investopedia.com, September 8, 2022
   6. Investopedia.com, November 30, 2022
   7. Investopedia.com, November 8, 2022
   8. IRS.gov, 2023</sup>

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2023 TAX GUIDE

How to Prepare for Tax Season

Presented by Marc Aarons

Understand Where Your Federal Tax Dollars Go

In this guide, we will explore where your tax dollars go, some of the ways tax filing may look different, and what you can do to prepare. Keep in mind, this guide is for informational purposes only and is not a replacement for real-life advice, so make sure to consult your tax, legal, and accounting professionals before modifying your strategy.

Before we dive into the upcoming tax brackets and what you can do to prepare for the upcoming tax season, it can be helpful to understand precisely how the government allocates your federal tax dollars.

In 2022, the federal government spent $6.27 trillion, which equals 25% of the nation’s gross domestic product. Further examination reveals that three significant areas of spending made up the majority of
the budget.¹

Medicare

Medicare accounted for $755 billion, or 12% of the budget, in 2022.¹

Defense Spending

Another $767 billion, or 12% of the budget, was paid for defense and security-related international activities. The bulk of the spending in this category reflects the underlying costs of the Defense Department. This includes the cost of multiple defense initiatives and related activities,
described as Overseas Contingency Operations in the budget.¹

Social Security

Nineteen percent of the budget, or $1.22 trillion, was paid for Social Security, which provided monthly retirement benefits averaging $1,632 to over 48 million retired workers. Social Security also provided benefits to 3 million spouses and children of retired workers, 6 million surviving children and spouses of deceased workers, and 9 million disabled workers and their eligible dependents.^1,2

The Tax Brackets

The tax brackets are: 10%, 12%, 22%, 24%, 32%, 35%, and 37%. Here are the tax brackets and the corresponding income ranges.³

These modest changes to the tax brackets also mean that wage earners may fall into lower brackets.
Here is one example. A single filer at $88,000 in taxable income would fall into the 24% bracket for
tax year 2021. The filer would be in the 22% tax bracket in 2022. These new rates are scheduled to expire in 2025 unless Congress acts to make them permanent. Exemptions also changed under the new tax code.

Keep in mind that the tax brackets are representative of how much you will pay for each portion of your income. For example, if you make $100,000 for the 2022 tax year and are married filing jointly, you would pay 10% on the first $20,550, 12% on the next $63,000, and 22% on the final $16,450. You would not pay 22% for the entire $100,000 of your annual income.

Here is an overview of the standard deductions over the past two years:³

IMPORTANT DEADLINES*

JANUARY 17, 2023

If you are self-employed or have other fourth-quarter income that requires you to pay quarterly estimated taxes, postmark this payment by January 17, 2023.

APRIL 18, 2023

FIRST QUARTER 2023 ESTIMATED TAX PAYMENT DUE

2022 INDIVIDUAL TAX RETURNS DUE

Most taxpayers have until April 18 to file tax returns. Email or postmark your returns by midnight on this date.

LAST DAY TO MAKE A 2022 IRA CONTRIBUTION

If you have not already contributed fully to your retirement account for 2022, April 18 is your last chance to fund a traditional IRA or a Roth IRA.

INDIVIDUAL TAX RETURN EXTENSION FORM DUE

If you cannot file your taxes on time, file your request for an extension by April 18 to push your deadline back to October 16, 2023.

JUNE 15, 2023

SECOND QUARTER 2023 ESTIMATED TAX PAYMENT DUE

SEPTEMBER 15, 2023

THIRD QUARTER 2023 ESTIMATED TAX PAYMENT DUE

OCTOBER 16, 2023

EXTENDED INDIVIDUAL TAX RETURNS DUE

If you received an extension, you have until October 16 to file your 2022 tax return.

*The IRS has the authority to adjust federal tax deadlines on short notice based on its assessment of financial or economic conditions. Also, please note that tax deadlines that fall on weekends or national holidays will be delayed until the following business day.

The Child Tax Credit

In 2021, the American Rescue Plan Act increased the child tax credit to up to $3,600 per child. Legislation to extend the 2021 child tax credit was not passed, so the credit reverted back to the 2020 credit of up to $2,000 per child for 2022. While the 2021 child tax credit was fully refundable, the 2022 tax credit is only partially refundable.

The 2022 credits phase out at income thresholds of $200,000 (or $400,000 for married taxpayers filing jointly).⁴

Preparing for the Tax Season

Planning well in advance of the tax season may help better prepare you for the unexpected. Here are several reasons to begin early:

• Your home, job, or relationships changed
• You need to start saving money if you may owe taxes
• You want to ensure you qualify for tax deductions

You can make changes throughout the year to ensure that your tax preparations go smoothly.

In particular, you can make periodic assessments of your paycheck withholdings so that you will get a refund or can reduce or eliminate your tax burden.

You should keep track of and store your tax and other financial records to avoid delays or frantic preparations as the filing deadline approaches. Records may include W-2 forms, canceled checks,
certain receipts, and previous years’ returns.

Here is a list of other items to start gathering:

• Pay stubs
• Mortgage payment records
• Closing paperwork on home purchases
• Receipts for items or services you may want to claim as itemized deductions
• Records on charity giving and donations
• Mileage logs on cars used for business
• Business travel receipts
• Credit card and bank statements to verify deductions
• Medical bills
• 1099-G forms for state and local taxes
• 1099 forms for dividends or other income

During the first few months of 2023, make sure you receive your W-2 and 1099 forms as well as other tax documents. Leave adequate time to collect documents and prepare to file your taxes prior to the April 18, 2023 deadline.

Tightening the Nuts and Bolts

Here are some ways to prepare this year for next year’s tax season:

Look at last year: Take one more look at last year’s return. In the months ahead, you may still have the opportunity to contribute more to your retirement plan, which may lower your taxable income.

Donate to charity: How about “bunching” your charitable donations?

Bunching provides you with the ability to optimize your deduction allowances by making two or more years’ worth of charity donations in one year.

Let us say you are married, you expect to itemize your deductions, and you anticipate making $15,000 in annual donations. By donating $30,000 in one year and skipping the next, you may be able to qualify for a higher deduction.⁵

Review Capital Losses: If you are investing in the financial markets, you may want to consider deducting capital losses; you have the opportunity to claim deductions if you experienced losses.

You can claim losses only if they exceed capital gains. You are allowed to claim the difference of up to $3,000 per year if you are married filing jointly or $1,500 if you are filing separate returns. Net losses that exceed $3,000 can be carried over into future years.⁶

Deductions for capital losses can only be applied to investment property sales but not to the sale of investment property that was held for personal use.

Get organized: Find a place to store your tax documents until it is time to prepare to file. A good record-keeping system may alleviate concerns later as the deadline gets closer.

If you have your documents or prior-year returns stored on your computer, make sure you back them up on a thumb drive or other device or system in case your computer is hacked or stolen.

Consider other taxes: Keep an eye on local and state government requirements that may affect your specific tax situation.

How Long?

The IRS provides recommended timelines for retaining financial documents:⁷

1. You should keep your tax records for three years if #4 and #5 below do not apply to you.
2. You should keep records for three years from the original filing date of your return or two years from the date you paid your taxes. Select whichever is the later date. This is if you claimed a credit or refund after you filed your return.
3. You should keep your records for seven years if you claimed a loss from worthless securities or a bad debt deduction.
4. You should keep your records for six years if you failed to report income that you should have, and the income was more than 25% of the gross income listed on your return.
5. Keep records indefinitely if you do not file a return.
6. You should keep employment tax records for at least four years after the due date on the taxes or after you paid the taxes. Select whichever is later.

MMI Disclosure: This material was prepared by MarketingPro, Inc. for use by Marc Aarons.  This Special Report is not intended as a guide for the preparation of tax returns. The information contained herein is general in nature and is not intended to be, and should not be construed as, legal, accounting or tax advice or opinion. No information herein was intended or written to be used by readers for the purpose of avoiding penalties that may be imposed under the Internal Revenue Code or applicable state or local tax law provisions. Readers are cautioned that this material may not be applicable to, or suitable for, their specific circumstances or needs, and may require consideration of non-tax and other tax factors if any action is to be contemplated. Readers are encouraged to consult with professional advisors for advice concerning specific matters before making any decision. BothMarc Aarons and MarketingPro, Inc. disclaim any responsibility for positions taken by taxpayers in their individual cases or for any misunderstanding on the part of readers. Neither Marc Aarons nor MarketingPro, Inc. assume any obligation to inform readers of any changes in tax laws or other factors that could affect the information contained herein.

^Citations.

1. ^{Treasury.gov, 2023}
2. ^{SSA.gov, 2023}
3. ^{IRS.gov, 2022}
4. ^{Investopedia.com, February 24, 2022}
5. ^{IRS.gov, 2022}
6. ^{IRS.gov, 2023}
7. ^{IRS.gov, 2022}

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