Tax Planning Tips
Whether you had a good year or your finances are rebounding from the pandemic, there are many ways you can save on your taxes. Start tax planning today with these easy-to-follow tips:
Maximize Your Deductions
One of the best ways to plan for year-end taxes is by maximizing your deductions. There are many ways to accomplish this feat, including:
Review Your Withholdings
Your employer uses Form W-4 to determine how much money to take out of your earnings for taxes. If this amount is too high, you’re giving Uncle Sam a free loan. Likewise, if it’s too low, you’ll end up owing at the end of the year — and you could even face underpayment penalties. Therefore, we recommend aiming for a zero-dollar tax bill. The key to achieving this mission and paying the right tax amount throughout the year is to update your W-4 annually or whenever you experience life changes, like:
Getting married or divorced.
Having a baby.
Securing a second job.
Earning a raise.
Starting a business.
Buying a home.
Itemize Your Deductions
Another sound tax planning practice that can help you reduce your end-of-year liabilities for 2022 is to take advantage of any itemized deductions. The standard deduction for a married couple filing jointly rose $800 for 2022, up to $25,900. According to the IRS, 70% of Americans take the easy route and use this figure on their returns. However, you could be leaving money on the table with this approach. If your qualifying expenses exceed the standard deduction, you should definitely consider itemizing. Typical costs you can consider itemizing are:
Mortgage interest.
State income tax.
Local sales tax.
Qualifying medical and dental expenses.
Consider a Home Office Deduction
If you work from home and your office meets the requirements, consider using it for a tax deduction. The post-pandemic work culture has changed for good, and many people earn the bulk of their paychecks from home. If you’re among this group, your home must be your principal place of business.
An employed telecommuter may not qualify. However, if you’re self-employed or a 1099 contractor and use your home office exclusively and regularly for work, you can save big with this deduction. Some taxpayers opt for the simplified method, which equates to $5 per square foot, or they use the regular method and calculate all qualified expenses, such as the business-only portion of the homes:
Real Estate Taxes.
Mortgage Interest.
Depreciation.
Rent.
Utilities.
Insurance.
Maintenance and repairs.
Casualty losses.
Take Advantage of Tax Credits
The government offers several tax credits that can offset the amount you owe. A credit works differently than a dedication in that you can subtract this amount from your final tax bill. It directly offsets what you owe, dollar for dollar, as opposed to reducing the amount of your taxable income the way a deduction does. The value of the credit varies, and some are even refundable if they are higher than your debt, like the Earned Income Credit that’s so beneficial to many low- to moderate-income families. The IRS offers numerous credits, including:
Child and Dependent Care Credit.
Lifetime Learning Credit.
Retirement Savings Contributions Credit.
Adoption Credit.
Mortgage Interest Credit.
Residential Energy Credit.
Work Opportunity Credit.
Make End-of-Year Contributions
Year-end contributions are another way to manage your annual tax liability. Consider making one or all of the following:
Contribute to Retirement Accounts
Most financial planning studies suggest contributing between 15% and 20% of your gross income into a retirement account. The IRS allows you to contribute $6,500 (or $7,500 if you’re 50 or older) to your traditional or Roth IRAs for 2023. This represents an increase over 2021’s limit of $6,000 and $7,000, respectively.
If you have a 401(k) instead of an IRA, those contributions were made pre-tax and aren’t included in your taxable revenue. That’s the core of their appeal: deferred income. That means you don’t have to report any 401(k) income on your return until you start taking a distribution — usually after retirement. As a result, your taxable income is less for the current year, which lowers your IRS bill.
Make Charitable Donations
There are many reasons to donate to your favorite charity, from personal to financial. When you contribute to a qualifying organization, it’s a great way to reduce your tax bill, and you control the timing. You have until Dec. 31 to make your gift and take advantage of this saving strategy, and there’s even more good news. The IRS has temporarily suspended its limits on charitable donations. Previously you could only contribute up to 60% of your adjusted gross income, but now you can donate it all. Yes, even 100%.
Pay Off Medical Bills
Paying off your unreimbursed medical bills at the end of the year also has tax advantages. The IRS allows you to deduct out-of-pocket payments for healthcare-related expenses that exceed 7.5% of your 2022 adjusted gross income. However, you must itemize rather than take the standard deduction. In addition, you can claim costs that weren’t fully covered by your insurance company, like:
Preventative care.
Surgeries.
Dental and vision care.
Psychologist and psychiatrist visits.
Prescription medications.
Glasses and contacts
False teeth.
Hearing aids.
All unreimbursed COVID-19 expenses.
Travel expenses for qualified care, like mileage.