7 Steps for Reducing Your 2022 Taxes
If you think the amount you’ll pay in income tax is predestined, I have some good news: It’s not! There are steps you can take before the end of the year to reduce your tax burden for 2022 and beyond.
Consider employing as many of the following seven tax-planning tips as possible so you can hold on to more of your money.
1. Invest in a traditional IRA
If you’re expecting a year-end bonus, consider investing at least part of it in a traditional IRA. When you invest deductible contributions, you don’t pay taxes on the investment until you withdraw the money (when you’ll most likely be in a lower tax bracket). This means your year-end bonus will be working for you and providing you with extra cash for years to come.
Also, remember you have until Tax Day – April 18, 2023 – to contribute to your traditional IRA for the tax year 2022.
2. Check your tax withholdings
According to the Internal Revenue Service, the average 2021 tax refund was more than $2,800. While receiving a big return can feel like an unexpected gift, it’s not free cash. It’s your money! All you’re really doing is letting the government borrow your money without interest.
Think of what you could do with $2,800 (or whatever your average refund is) during the year. You could open an online savings account (many pay interest rates higher than traditional financial institutions) or a money market account. Remember, any amount of interest is better than the 0% you get from the government!
So, don’t let Uncle Sam use your money all year for free. Double-check how much you’re having withheld from each paycheck and make an adjustment if you’re withholding too much. If you’d like help in figuring out how much to have withheld from your paycheck, check out the IRS’s Tax Withholding Estimator.
3. Make charitable gifts
Making gifts to charity is a boon to the organization you’re donating to and lowers your taxable income. You can deduct direct cash gifts to public charities up to 100% of your adjusted gross income. Even if you don’t itemize deductions, you can claim a $300 deduction per person for cash donations to charity (in addition to the standard deduction).
But you should think beyond cash. Start now and find items to donate. It’s a win/win: You’ll declutter your home of items you no longer use or enjoy, and you’ll receive a tax deduction. If you need help figuring out the value of donated goods, check out TurboTax’s ItsDeductible app. Be sure to get a written receipt from the organization you donate to, and for items with a value higher than $5,000, you’ll need to provide a written appraisal to the IRS as proof.
4. Prepay deductible expenses
If you’re going to itemize your tax return, consider prepaying some of next year’s deductible expenses.
For example, you can pay January’s mortgage payment early and include the interest deduction in 2022’s deductions. You can also deduct up to $10,000 in state and local taxes. So, if your 2022 property tax bill comes in under the 10k threshold, it may be fruitful to prepay January’s property tax bill in December so you’ll have it as a deduction on your 2022 taxes.
If you’re paying for your child’s undergraduate college tuition, you can pay next semester’s tuition bill in December and claim the American Opportunity Tax Credit, worth up to $2,500 per qualifying student. If you’re married and filing jointly, you can claim the full credit if you have an adjusted joint income up to $160,000, and you can claim a partial credit if you have an income up to $180,000.
5. Contribute to a 529 plan
If you have some extra cash, you can reduce your state tax burden by putting some of it aside in a 529 plan for future college expenses. In Michigan, you can deduct the entire amount invested in the state’s prepaid tuition savings program, the Michigan Education Trust or MET.
If you open a Michigan Education Savings Program account or contribute to an existing MESP account, you deduct up to $10,000 a year if you’re married, filing jointly, and up to $5,000 a year if you’re a single filer.
6. Max out your 401(k)
Contributing as much as possible to your 401(k) is a terrific way to lower your taxable income. In 2022, you can contribute up to $20,500 to a 401(k), and if you’re 50 or older, you can contribute an additional $6,500. This means if you make $100,000 a year and contribute the maximum to your 401(k), your taxable income falls to $79,500 or $73,000 if you’re 50 or older.
7. Spend any amount left in your FSA
Putting money aside in a flexible spending account is a great way to pay for out-of-pocket healthcare costs because the money isn’t taxed if you withdraw the funds for allowed expenses. However, if you don’t spend all the money before the end of the year, you’ll pay taxes on any money left in your account.
If it looks like you’ll have money left in your FSA at the end of December, spend it on expenses you know you’ll have in 2023. Fill any prescriptions you can and buy FSA-approved items like extra contact lenses and eyeglasses.
If you’d like guidance on how to lower your 2022 taxable income or prepare for 2023, you can schedule a free, no-obligation consultation with our team of experienced financial advisors here.