Many people avoid thinking about taxes until the April deadline arrives every year. But by then it may be too late to take advantage of these top strategies to cut your tax bill—or get a bigger refund.
Give yourself time before January 1 to complete these quests while they’re still active.
6 tax things to do before 2022 ends
Federal tax returns and filing deadlines are April 18, 2023 (state deadlines vary, but many match federal deadlines). Although W-2 income statements won’t be sent out until the end of January, you can use online calculator Now to estimate what you might owe. All you need is your pay stub for the year, showing how much you earned and how much you paid income tax.
If you’re hoping to shrink your tax bill or perhaps increase your tax refund, here are some strategies to try—along with a time-saver that will help you prepare your tax return with ease. than.
1. Create an IRS Account Online
Tax season tends to go smoother when you’re organized. Take 15 minutes to set up one online account on the IRS website so you don’t have to rummage through desk drawers or call your previous employer to get a replacement copy of your W-2 at the last minute.
While you can’t actually file taxes from your account, you can access a digital transcript of the past four years of tax returns and income documents, pay balances, make quarterly payments Estimates, set up payment plans and get term extensions.
To create an account, you’ll need your passport, driver’s license, or state ID. The IRS uses the ID.me platform for identity verification, so the process will also require taking a selfie with facial recognition software or recording a short video chat with an employee.
2. Contribution to an employer-sponsored retirement account
If you have access to a 401(k)457, or 403(b) through your employer, your contributions are cut out of the top portion of your paycheck, before income tax is calculated (you pay taxes after withdrawal). money).
For example, let’s say your gross annual salary is $90,000 and you contribute 10% of your salary, or $9,000, to your 401(k) fund through pay deferrals throughout the year— this brings your taxable income to $81,000. Thanks to pre-tax retirement contributions, your top tax rate is 22% instead of 24%.
Every retirement plan has an annual contribution limit. If you haven’t hit your limit yet and can’t afford to spend your last extra paycheck this year on a plan, it’s an option, says Marla Chambers, a senior accountant and financial planner at good. Buckingham Advisor.
Chambers adds that most employers allow you to adjust your deferral amount “on the fly” if you contact human resources directly.
If you can’t rotate it by December 31, consider contributing to a Traditional IRA. Deposits can be counted through 2022 through the April tax filing deadline and can be considered a tax deduction (they’re actually the same as a pre-tax paycheck) if you meet the requirements on income and filing status.
3. Evaluate the standard deduction against the itemized deduction
The vast majority of taxpayers claim the standard deduction to reduce their income by a set amount: $12,950 for single filers and $25,900 for joint filers in 2022.
However, some taxpayers can unlock a larger deduction by adding up certain allowable expenses, called itemized deduction. These include state and local taxes, property taxes, mortgage interest, out-of-pocket medical expenses, federally declared theft or disaster-related losses, and donations to organizations from tax exempt.
If you’ve paid any expenses for the year and think the total could add up to more than the standard deduction for your filing status, it’s time to do the math to determine if the conversion worthy or not. If you’re going to pass the standard deduction, consider “pooling” future expenses this year, says Chambers.
For example, if your mortgage payment is due on January 5, pay it in December instead so you can calculate the interest portion as the 2022 expense. Likewise, if you want regularly donate money to your favorite charity, consider moving some of next year’s planned donations into this year. “It’s a great planning tool and it’s pretty easy to do,” says Chambers.
4. Sell a losing investment to make up for it
The IRS taxes capital gains, which is the profit you make when you sell a Shareexchange-traded funds (ETFs), or mutual funds.
But not all investments add value—and you can use that to your advantage. If you have an investment that has depreciated since you bought it, you can sell it before December 30, the last trading day of the year, and claim a loss. That loss will be applied to your capital gains for the year, greatly reducing your taxable amount.
For example, if you made $6,000 in profit from the sale of Stock A this year, but realized a loss of $4,000 on the sale of Stock B, your total taxable gain would be $2,000. .
If your total capital gain falls to zero and you still have a loss, you can offset your income for the year up to $3,000. “This year is especially a good year to look at stocks that are running low” and taking losses, Chambers said.
This strategy, known as tax-loss mining, is a popular and effective tax saver for investors using a brokerage account (it doesn’t work with retirement accounts, due to the deferred feature). tax). Some robot advisor even do it automatically. But to maintain a balanced portfolio, experts recommend buying back similar investments after a sale.
“Now, the IRS has a small caveat to this rule that you cannot buy that same security within 30 days of selling it because it would violate the so-called wash and sell“Jonathan Johnson, senior accountant and financial advisor at Blue chip partner.
For example, you can’t sell your shares in Coke for a loss and then buy them back immediately, he explains. But you can buy a stake in Pepsi, since it’s a different company (or just wait 30 days) and maintain your exposure to that sector, says Johnson.
5. Contributing to a 529 . Education Savings Plan
College is getting more expensive over the years, and more and more families are looking for effective ways to accumulate money to cover tuition and other school-related expenses.
One option is the 529 savings plan, which allows people to invest money in stock and bond mutual funds, but avoid paying any federal capital gains taxes on growth as they use the money. for qualified educational expenses. It also offers immediate and often more generous tax breaks at the state level.
Based on a report by BlackRockadministering a 529 plan in Ohio, three dozen states offer income tax credits or deductions to anyone who contributes money to a 529 account, including parents, grandparents, and other relatives (in In some states, only account holders are eligible for tax incentives).
Furthermore, Chambers adds, “if a state allows a $5,000 deduction but you give $10,000, most states will allow you to convert to [the difference] into subsequent years until you use them up.” Test your state’s plan options—some even allow tax breaks for other state plan savers.
6. Check your tax deductions for next year
To prepare for the new year, take the time to review and update Model W-4 if you are a salaried or hourly worker. This document tells your employer how much to take from your paycheck to cover taxes.
Whenever your personal or financial situation changes (for example, you get married, have a baby, or get a second job or contract job), it’s a good time to review your withholding. Friend.
If you owe Uncle Sam money in April, you didn’t keep enough. If you end up with a refund, you’ve withheld too much. Johnson says: If you haven’t updated your W-4 for 2022, review your 2021 tax return to see how much has been withheld and what your tax bill or return looks like to adjusted for the upcoming calendar year.
File a new W-4 as soon as possible to deduct the correct amount from your paycheck in 2023—it can take up to 30 days for employers to update payroll deductions.
The clock is running out to make some big tax moves for 2022. If you want to reduce your taxable income, strategies include increasing your 401(k) contributions and considering the possibility of listing list your deductions. If you are an investor, think about cutting your losses on depreciated investments by harvesting tax losses.