7 Tips for Tax Time
As the old saying goes,the only things you can’t avoid in life are death and taxes.
The better organized and prepared you are before your tax return is due,the better you’ll feel and the more likely you are to take advantage of strategies to reduce your taxes and increase your potential refund.
1. Double-check your withholding
The end of the year is a great time to review your current withholding allowance to decide if you want to change it. Just look at your paycheck and talk with the payroll department at work about adjusting your withholdings as necessary.
2. Max out your retirement account contributions
The deduction limit for 401(k) contributions for 2022 taxes is $20,500,and that does not count employer contributions. If you’re over 50,you can contribute more with “catch-up” contributions totaling $6,500 if permitted by your 401(k) plan.
For IRAs,the maximum amount of tax-deductible contributions for 2022 is $6,000,or $7,000 if you are over 50. However,the amount of money that you can deduct from your taxes depends on both your income and whether you have a work-provided retirement plan.
Talk to your plan administrator to learn more about your options.
3. Make your home more energy efficient
The American Recovery and Reinvestment Act of 2009 tripled the amount of tax credits you can get for increasing your home’s energy efficiency. Installing a solar energy system,wind turbine or geothermal heat pump can now give you 26% of the cost back if completed before Jan. 1,2023.
Tax credits for energy improvements aren’t limited to alternative energy. Simply installing new Energy Star-certified furnaces and boilers can reap tax credits too. Check the manufacturer’s tax certification statement,as not every Energy Star-certified product is eligible.
4. Track your charitable contributions
Most taxpayers can generally deduct charitable donations up to 50% of their taxable income.
Before donating to anyone,make sure that your contribution will be tax deductible by searching the IRS’ tax-exempt organization database. All valid charities and non-profits will also have a tax identification number identifying them as tax-exempt.
5. Check your required minimum distributions from retirement accounts
US tax law requires that Americans start receiving distributions from their personal or work-provided retirement accounts when they reach a certain age. These distributions are mandatory for 401(k) plans,traditional IRAs,profit-sharing plans,and pensions. They’re not required for Roth IRAs while the owner is alive. While the administrator of your retirement plan is required to follow tax law for distributions,it’s up to you to make sure you’re getting the right amount. If you don’t meet the required amount,you’ll face the harshest IRS penalty around — 50% on the shortfall.
6. Combine your medical expenses into one year
Medical expenses can be a significant deduction for many taxpayers,but the IRS only allows you to deduct expenses that are more than 7.5% of your adjusted gross income. For that reason,it can be advantageous to group all of your major medical expenses into one year.
If you’re approaching the 7.5% threshold this year,consider making health-related purchases by the end of December. Get your teeth straightened,buy those new glasses,or schedule that elective surgery,and you’ll maximize your medical deductions.
Similarly,if you’re not approaching that threshold,hold off on any non-urgent health-related purchases until January,when they could be more advantageous for next year’s income taxes.
7. Strategize your business expenses
Deducting business expenses can save you considerable money on taxes if you’re self-employed or a freelancer. Consider prepaying for next year’s expenses before the end of the year to reduce your tax burden for next year.
2022 is quickly fading into the rear-view mirror. It may be too late to implement some of these strategies for this year’s return,but being aware of steps you can take to minimize your tax burden will deliver value (and hopefully a lower tax bill or larger refund) every year.
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