Now that your 2022 taxes have been filed, it is a good idea to carefully review your return with an eye toward identifying tax-saving opportunities for the current year before you put your tax file away to gather dust. Having a good handle on your sources of taxable income, how they are taxed, your marginal and average tax rates, and your use of deductions and credits can help you think about how things might change for the current tax year and what steps need to be taken to reduce your tax bottom line next April.

Start by taking a run down the first page of your Form 1040 and note the sources of taxable income. Remember that some income sources are taxed at preferential rates. Qualified dividends, for example, are generally taxed at a 15% rate, although this rate drops to zero for taxpayers who are in the lowest tax brackets. The same approach applies to long-term, realized capital gains. For taxpayers in the top tax brackets, the rate on qualified dividends and long-term gains jumps to 20% and an extra 3.8% Net Investment Income Tax may also kick in. Note also that your gross income from some sources can differ from the taxable amount. For IRA withdrawals, for example, the taxable amount on line 4b of Form 1040 can be lower than the line 4a amount if the taxpayer had made non-deductible IRA contributions in prior years. The taxable amount of Social Security benefits will also be lower than the gross amount because this income is only 85% taxable at most. Social Security recipients with smaller sources of other income may only see 50% of their retirement benefits subject to tax.

Summing these income streams will give you your total income, but you need to go a step further to determine your marginal tax rate which is a key variable for planning purposes. Your marginal rate is based on your taxable income which is computed by subtracting allowable adjustments like IRA contributions and student loan interest as well as your standard deduction or itemized deductions, whichever is larger. This taxable income amount and your filing status (single, married filing jointly, head of household) will land you in one of seven tax brackets (10%, 12%, 22%, 24%, 32%, 35% and 37%) that determine the rate you pay on the next dollar of income. Your marginal rate tells you how much tax you can save by reducing your taxable income by a dollar. For example, if you are in the 24% bracket, every additional $1,000 dollars you can defer into your 401(k) (or HSA, FSA, and traditional IRA) will provide $240 of tax savings. Knowing your marginal tax bracket is also critical for determining how much additional income you can receive before jumping into the next tax rate. This is important for tax planning around retirement when it may be beneficial from a long-run tax perspective to implement Roth conversions to get untaxed IRA dollars through the tax window in anticipation of higher future tax rates.

Remember that your marginal tax rate does not apply to all your income. The first dollars are always taxed in the lower brackets first, meaning that your average or effective tax rate (total tax divided by total income) will be lower.

Pay attention to the capital gains line (Form 1040 line 7). If the number here is      -$3,000 you had realized losses that exceeded realized gains and likely have additional losses carrying forward to be used in the current tax year. Look for a carryforward worksheet for short-term and long-term losses available to offset 2023 realized gains.

While you may be using the standard deduction instead of itemizing deductions for medical expenses, state and local taxes, mortgage interest and charitable contributions, you may still want to evaluate whether you will have enough deductions to itemize in the current year. If you are close to exceeding the standard deduction, you can consider bunching charitable contributions in every other year so that you reap some tax benefit. Retirees who have reached required minimum distribution (RMD) age should consider sending some or all their IRA withdrawal to charity (up to $100,000) as a qualified charitable distribution. These withdrawals satisfy the RMD requirement while leaving the income out of the taxable income calculation providing a significant tax benefit without having to itemize deductions.

David T. Mayes is a CERTIFIED FINANCIAL PLANNER^TM professional and IRS Enrolled Three Bearings Fiduciary Advisors, Inc., a fee-only advisory firm in Hampton. He can be reached at (603) 926-1775 or david@threebearings.com.

This article originally appeared on Portsmouth Herald: Money Talk: Review your tax return for planning opportunities