5 Year-End Tax Strategies to Reduce Your IRS Bill
As we head into the last few weeks of 2022, it’s time to get ready for the holidays and the upcoming tax season. We know, talking about tax prep before Christmas is like putting up your tree after the 4th of July, but you’ll be filing your tax return before you know it. Thankfully, there’s still time to make some adjustments that could result in a lower tax bill come April. So, before you start preparing your Thanksgiving feast and shopping for the best Black Friday deals, take a look at these five year-end tax strategies that could save you money.
Year-End Tax Strategies For Most Taxpayers
Here’s our list of the top year-end tax strategies that most taxpayers can implement before January 1.
Maximize Retirement Contributions
One of the best ways to help reduce your tax bill (and save for your future) is to contribute to a tax-deferred retirement account. That’s because the contributions will help lower your taxable income.
For a company-sponsored 401(k) plan, you can contribute up to $20,500 in 2022. That increases to $27,000 if you’re 50 or older. If you have a traditional IRA, you can contribute a maximum of $6,000, or $7,000 if you’re 50 or older. One upside to traditional IRAs is you have until the tax filing deadline (April 18, 2023) to make your contributions and count them on your tax return.
Contribute to Your HSA
Another way to reduce your taxes is to contribute to a health savings account (HSA). All HSA contributions are tax-deductible, or if you make them through a payroll deduction, they will lower your overall taxable income. Additionally, all interest earned in your HSA is tax-deferred. Withdrawals are also 100% tax-free if made for eligible medical expenses.
For 2022, you may contribute up to $3,650 (self-only) or $7,300 (family coverage). If you are 55 or older, you may contribute an additional $1,000. If you don’t spend the money in your HSA, it will roll over. This can help you save money for healthcare expenses and services you may need at a later date.
Schedule Expensive Medical Procedures ASAP
If you plan to itemize, one of the ways you can reduce your taxes is by deducting your medical expenses. Of course, your expenses must exceed 7.5% of your gross adjusted income to qualify, but there are ways to bump up that number. If you need to purchase required medical equipment, take expensive tests, or have an upcoming surgery, try to pay for those expenses before the end of the year.
By lumping your higher medical expenses together, you can maximize your deduction and take advantage of a lower tax bill.
Increase Your Tax Withholding
Another option for reducing your tax bill in April is to increase your tax withholding for the remainder of the year. This is especially helpful if you’ve recently won money or earned any income that wasn’t subject to withholding. Simply update your Form W-4 with your employer and indicate the additional amount you’d like withheld on Step 4(c) of the form. Since the money withheld is treated the same as if it was taken throughout the year, it may help you reduce or eliminate any underpayment penalties and interest. To determine how much you should withhold, speak with a tax professional and check out the IRS Tax Withholding Estimator tool.
Give to Charity
Although the $300 charitable contribution deduction ($600 for couples) for those who claim the standard deduction is no longer available in 2022, there are other ways to give to a charity that may help reduce your tax burden if you itemize.
- Donate appreciated non-cash assets. If you’ve held a non-cash asset for longer than a year and it’s appreciated, donate the item to a charity. You’ll not only avoid the capital gains tax you would incur if you sold the item, but also get to take the charitable deduction.
- Take advantage of depreciated securities. Bad year in the stock market? Sell your depreciated investments to help offset capital gains and donate a portion to charity. If your losses exceed your gains (minus your donation), you can also subtract up to $3,000 from your regular income and carry any balance forward for future tax years. It’s one way to turn a loss into a win!
- Bunch donations using a donor-advised fund. Similar to a charitable checking account, a donor-advised fund allows you to take a bigger upfront deduction by bunching your donations.
- Make a qualified charitable distribution (QCD). If you need to take a required minimum distribution (RMD) from your IRA this year, you can transfer up to $100,000 to an eligible charity through a QCD. Since QCDs don’t increase your taxable income, both higher tax brackets and phaseouts can be avoided. To ensure a QCD counts toward your RMD, the transfer must be made by December 31.
Get Help From a Tax Professional
If you’re worried that your tax bill may be a little higher than you can manage, now is the time to speak with a tax professional. At MoneySolver, we can help identify ways for you to reduce your 2022 tax bill, as well as plan for how to pay any taxes you may owe. For a free, confidential consultation, call 855-476-6920 today!