Taxes won’t go away in the new year, but some lesser-known facts could give you some holiday cheer.

Here are 3 opportunities for tax savings that you may have overlooked:  

1. Ring in The New Year with Lower Effective Tax Rates

The IRS is giving out New Year’s bonuses with the new tax brackets for next year. They have expanded the income ranges, lowering overall income taxes for most taxpayers!

First, remember that tax brackets are like buckets, you fill up one before moving to the next. The expansion for 2023 makes each bucket bigger. This means more dollars fill in the lower tax buckets, lowering effective tax rates. An effective tax rate is the average or blended percentage paid for taxable income.

For example, let’s say my taxable income is $150,000 in 2022, my tax buckets would look as follows:

Effective Tax Rate = 19.89% = $29,835 / $150,000

Now, let’s say my taxable income will stay the same in 2023, the new tax buckets would look as follows:

Effective Tax Rate = 19.6% = $29,400 / $150,000

With the 2023 tax brackets I’ll pay more tax at lower percentages and less at higher rates on the same amount of income, causing my effective tax rate to go down.

What does this look like at other income levels? Here’s an overview of the tax savings at various income levels:

Surprisingly, the savings start to max out at a certain dollar amount. For example, income levels between $250,000 and $500,000 have a maximum benefit of $1,859. In addition, there’s a clear marriage penalty; married couples need to make almost double the income to start seeing higher benefits. Regardless, taxpayers can expect a lower effective tax rate in 2023.

2. Gift Your RMD This Holiday Season 

For those eligible, remember to take your Required Minimum Distribution (RMD) by the end of the year—forgetting can be a costly mistake. For some investors an RMD just means another tax bill; but did you know donating your RMD to charity could zero that bill?

This type of withdrawal is called a Qualified Charitable Distribution (QCD) and helps satisfy RMD requirements while paying no tax on the distribution. This strategy can be employed for up to $100,000 and the donation must go directly to a public charity—it cannot pass through a personal account or donor advised fund first.

For investors who don’t need their RMDs, this could be a great opportunity to get into the spirit of giving!

3. Boost Your Education Savings with I-Bonds

I-Bonds have been all the rage this year with interest rates peaking at 9.62%, but that also means a higher tax burden. While I-Bond interest is not subject to state or local taxes it is subject to federal income taxes. However, the benefit could be tax-free if using I-Bonds for qualified higher education expenses.

The get the tax exemption the bond owner must have been over the age of 24 at the time it was issued. This means parents saving for a child’s higher education must buy the I-Bond in their own name rather than their child’s name.

In addition, bond owners must meet the following criteria to receive tax free interest:

• Modified Adjusted Gross Income less than $100,800 (single) or $158,650 (married) for 2022
• Tax return status is not married filing separately
• Higher education expense is for yourself, your spouse, or a dependent
• The education expense is paid in the same year the I-Bond is redeemed

With so many nuances we recommend you consult with a tax planner to create a forward-looking approach aimed at minimizing their lifetime tax bill. At Camelotta Advisors we’ve integrated personalized tax strategies into our clients’ financial plans and investment strategies pushing towards a zero-tax bill. Reach out to us today to start developing your tax plan.