First Look at 2023 Taxes

2023 was the most complex tax year in my life; a scary proposition since I’ve struggled with accurate tax planning since leaving the Army in 2019! Upon first look, it appears I may have gotten lucky and guesstimated our 2023 tax burden fairly accurately. Currently only looking to pay about an extra $1k this April…much improved over the huge bill I was into the IRS for this time last year!

I am confident I’m not the only veteran in this stage of life struggling with tax planning. As with every tax season, I’m learning a lot this year and eager to share what I’ve learned after an initial look.

Net Investment Income Tax. What the heck is net investment income tax? The IRS states that “NIIT applies at a rate of 3.8% to certain net investment income of individuals, estates and trusts that have income above the statutory threshold amounts.” The tax came about in 2013 but until now, we never had to worry about it. We sold one of our rental properties in 2023 and as I crunched the numbers in our tax software, I began swelling with pride that I had correctly calculated our capital gains tax and depreciation recapture.

Then I got to the section on NIIT and learned we owed an additional $5k! Make no mistake, as problems go, this is a good one to have. We did well on the sale of our property, and I’ll always give unto Caesar what is Caesars, but the old Soldier in me hates surprises.  I can’t blame anyone other than myself, I should have talked to a professional! The takeaway is, if you have multiple income streams and sell an investment asset, you may trigger a NIIT bill.  

Estimated Taxes.  The aforementioned oversight could have been costly, but thankfully, I had extra withholding taken out from my earned income and also paid quarterly estimated taxes in 2023. After screwing it up by the numbers in 2022, increasing withhold and paying estimated taxes was the only logical solution. 2023 was the first year I’ve paid “extra” and it wasn’t as painful as I thought it would be. Making quarterly estimated tax payments via the IRS website is a snap and it sure is better to pay as you go than have a hefty bill and fines in April!

Plan Ahead.  If I’ve learned anything about taxes it is to develop a plan every year. Reminder that this is a new concept for me; during my 24 years in the military, taxes weren’t really an issue!  As part of our 2023 tax strategizing, I decided to complete some fairly major (and costly) deferred repairs to a few of our rental properties, namely the installation of four HVAC systems! The expense of these repairs reduced our taxable gain from the rental activity. Additionally, we took a trip to inspect our out of state properties, something we hadn’t done since 2018! Most of the travel expenses are deductible. As a result, we showed a net loss on a few of our properties making the taxable income from rentals more manageable.

Deductions. As part of our planning, we also upped our charitable contributions for 2023 which helped reduce our Modified Adjusted Gross Income.  As part of our big, complex tax year, we purchased a new primary residence in 2023. While I am very familiar with the benefit of deducting mortgage interest on a personal residence, I completely forgot about deducting points! Like many people, we paid one “point” to buy down our mortgage rate when we purchased our new home. In reality, points are simply pre-paid mortgage interest and are fully deductible! Points are even indicated on the form 1098 one receives from the lender at the end of the year. The extra itemized deduction was a very welcome surprise which helped reduce our taxable income.

While it appears I’m at least in the ballpark on our 2023 taxes, it is also abundantly clear I still have a long way to go to master tax planning. Sure, some of my planning assumptions were correct, but I also overlooked a lot of details which could have been costly. I’m not sure if I’ll ever fully meet the challenge of planning for federal income taxes without the aid of a trained professional. I can’t imagine I’m the only veteran struggling with tax planning. Would love to hear other experiences!

Looking for a good how-to on wealth building? Check out my book, Millionaire on a Worker’s Budget: Five Financial Truth’s to Build Wealth on sale now at Amazon!

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