From now until the end of the year, you can take advantage of a variety of strategies to lower your taxable income. Increasing the safety of your retirement funds is a good place to start.
Contributing to a retirement plan allows you to take advantage of a current tax deduction and the tax-deferred growth of your savings within the plan, both of which are advantages. The compounding effect of the tax-deferred rate of return can result in larger account balances than would be the case with taxable accounts holding the same investments, but withdrawals are still subject to taxation.
As of 2022, the maximum annual contribution to a 401(k), 403(b), most 457 plans, and the federal government’s Thrift Savings Plan is $20,500. This will increase to $22,500 in 2023. Those over the age of 50 can put away an extra $3,500 in addition to the standard $2,500 annual savings limit.
The maximum yearly contribution to an IRA (individual retirement account) is $6,000 in 2016. In the United States, people over the age of 50 can put an extra $1,000 into their IRAs every year.
The Simplified Employee Pension Plan Individual Retirement Account (SEP IRA) is an excellent way for self-employed people to put more money away for retirement. For 2022, the limit for contributions to a SEP IRA is the lower of 25% of salary or $61,000.
While April 15 is the cutoff date for making these IRA contributions, it’s best to begin making preparations now to ensure adequate funding. As of April 18th, 2023, you must file your 2022 tax return (without an extension).
In 2022, the maximum annual contribution for an individual in a SIMPLE plan (which allows small employers to contribute to the retirement savings of their employees and themselves) is $14,000. Employees over the age of 50 can contribute an additional $3,000 per year to their SIMPLE 401(k) plans as a catch-up.
If you’re self-employed, a solo 401(k) can be an excellent retirement savings vehicle. In order to make contributions in 2022, the plan must be established by December 31.
If you choose to itemize, you can reduce your taxable income in a few different ways.
First, put your philanthropy to good use. Charitable contributions may be deductible in 2022 if your total itemized deductions exceed the standard deduction ($12,950 for singles and $25,900 for married couples filing jointly).
If you’re a homeowner who wants to get the most out of your mortgage interest tax deduction, you might want to consider making your January mortgage payment in December. You can also prepay your 2023 property taxes if your state offers this option. That sum can be applied to your state and local taxes.
Consider the rising cost of patients’ out-of-pocket medical expenses. In 2022, a taxpayer will be able to deduct the portion of their uninsured medical costs that is greater than 7.5% of their adjusted gross income. You can still schedule appointments and procedures that will increase the total cost of your deductible.
Put the most into your HSA if you have one. You can open a health savings account to save money tax-free for future medical costs if you have a high-deductible health insurance plan. It is not necessary to pay taxes on distributions used to cover healthcare costs.
You can contribute up to the IRS maximum allowed each year. In 2022, an individual is limited to contributing a maximum of $3,650, and a family is limited to contributing a maximum of $7,300. The annual “catch-up” contribution for those 55 and older is $1,000.
A Health Savings Account (HSA) contribution can be made right up until the tax deadline. The deadline to make a contribution for the 2022 tax year is April 18, 2023. According to the IRS’s “last-month rule,” you need to have been enrolled in an HSA-eligible health plan as of December 1 this year.
All of the $6,000 annual maximum contribution can be made to your HSA if you’re eligible to open one. You must, however, keep your current high-deductible health plan for the coming year. If you drop your health insurance before 2023, you may owe taxes and a penalty on the extra contribution.
Consider the tax benefits of your medical insurance. A flexible spending account (FSA) can be used instead. Unlike an HSA, FSA funds have a shorter time period in which to be spent. That is to say, you are not obligated to spend any remaining FSA balance at the end of the year. Put it toward medical expenses like copayments and deductibles, or invest in preventative care like new glasses or hearing aids if your insurance doesn’t cover them.
Throw out all the losers.
If you expect to have a taxable gain or loss from stock sales in 2022, you should minimize that amount as much as possible. Investors in stocks and bond funds (other than municipal bond funds) outside of a 401(k) or similar retirement savings plan are required to report and pay taxes on dividends and interest and may owe capital gains tax upon selling their holdings.
The money you make from selling investments during the year is subject to taxation. Dropping-value investments could be liquidated to reduce taxable gains. Losses from other sources of income are deductible up to $3,000 per year. Any further losses after that point may be carried over into the following fiscal year.