Making smart financial decisions before the year’s end can impact what you owe in April (and how much you’ll have to save for your other goals, like retirement). Put these five tax-saving strategies into effect before the end of the year.
How to Save on Taxes Before the New Year
Defer Your IncomeYou only pay taxes on income earned this year. If you’re self-employed, consider delaying billings until next year to help lower your upcoming tax bill. Deferring a year-end bonus could also reduce your taxable income. Remember, you’ll have to pay this tax eventually, so deferring your income is only a smart income tax savings strategy if you expect to be in the same (or lower) tax bracket next year.
Ramp Up Your Retirement SavingsThis year you can put away more (tax-deferred) income into your retirement accounts. The contribution limit for employees who participate in 401(k), 403(b), most 457 plans and the federal government's Thrift Savings Plan is increased to $20,500, while limits on contributions to traditional and Roth IRAs remains unchanged at $6,000. Those over age 50 can contribute an extra $1,000 per year. The more you invest into retirement now, the lower your tax bill will be in April.
If you’re age 72 or over, now is the time to check your IRA distributions. The IRS requires you to start taking regular minimum distributions from your traditional IRA account. Failing to withdraw sufficient funds will trigger a significant tax bill.
Squeeze In as Many Deductions as PossibleAll charitable contributions and business expenses accrued before the year’s end count as tax deductions. Unreimbursed medical expenses are also tax deductible so long as they exceed 10% of your adjusted gross income. If you’re close to the threshold, schedule services like dental cleanings and eye exams, or purchase new eyeglasses to receive the full deduction. Remember to keep your receipts.
You can also prepay certain bills, including tuition and property taxes. Increasing your deductions is one of the most reliable tax reduction strategies to help decrease the amount you’ll pay in taxes.
Boost Your HSAIf you have a health savings account (HSA) and a high deductible health insurance plan, you can claim tax deductions for your contributions to your HSA. Contribution limits are $3,650 for individuals and $7,300 for families, a slight increase from previous years. You can contribute an extra $1,000 if you’re over 55. Contributions are made with pre-tax dollars and can be withdrawn tax-free for qualified medical expenses. If you're looking to put more money in an HSA for 2022, you have until the due date for 2022 federal income tax returns, which is April 18, 2023.
Contribute to Your FSAEmployer-sponsored flexible spending accounts (FSA) help cover out-of-pocket healthcare expenses. And while you can’t deduct FSA contributions, the accounts are funded with pre-tax dollars, which reduces your taxable income. The limits are $2,850 per year, per employer, which can be used to cover deductibles, co-payments, prescription medications and qualified medical equipment. Just be sure to double check your account balance and spend any unused funds before the new year.
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