You can take action to help lower your 2022 tax bill later. It would help if you made contributions, or distributions, so you don't miss out on these tax-saving strategies. Here are five tax-saving moves to make now to help lower your taxable income:
TAX SAVING MOVES TO MAKE BEFORE 2022 ENDS
TAX SAVING MOVES TO MAKE BEFORE 2022 ENDS
1. Max out your tax-deferred retirement savings contributions. Tax-deferred retirement accounts like 401(K)s, 403(b)s, 457 plans, and IRAs fund with pre-tax dollars. Any contributions made before the end of the year will help lower your taxable income.
For the 2022 tax year, you can contribute up to $20,500 to your tax-deferred retirement savings account or $27,000 if you're 50 and older. The maximum IRA contribution is $6,000; if you're 50 and older, you can contribute $7,000 before December 31, 2022.
2. Take your required minimum distributions (RMDs). If you're over age 72, you must take RMDs from your tax-deferred retirement accounts by the end of the year. If you forget, you may be subject to a 50% penalty on the portion of your RMD you failed to withdraw. If you turn 72 in 2022, you have until April 1, 2023, to take your first RMD.
3. Contribute to a Roth 401(k). If your employer offers a Roth 401(k) and you haven't maxed out your traditional 401(k), you can make after-tax contributions to a Roth 401(k) up to the $20,500 limit and up to $27,000 if you're age 50 and older. To maximize your Roth 401(k) contribution, you must subtract the amount you contributed to your traditional 401(k), then donate it to your Roth 401(k) before December 31, 2022. Maximizing your Roth 401(k) can help lower your taxable income and save you at tax time too!
At age 72, Roth 401(k)s are subject to RMDs, but all contributions and earnings can be withdrawn tax-free.
4. Contribute to a 529 College Savings Plan. You may deduct state taxes for contributions you make to a state-sponsored plan. Even though there is no federal tax deduction for 529s, the money in these accounts grows tax-free and can be withdrawn to use toward qualified education expenses like tuition, room and board, and books. Many states offer a state income tax credit or deduction up to a certain amount for parents or grandparents that contribute.
5. Maximize your flexible saving account (FSA) contributions. Think of FSAs as employer-sponsored bank accounts to cover your out-of-pocket healthcare costs. If you still need to max your FSA contributions this year, you still have time to contribute. Employee contribution amounts are limited to $3,050 per year per employer. If you're married, your spouse can put up to $3,050 in an FSA with their employer.
Any funds that remain in your account on December 31, 2022, will roll over—but only if your employer has opted-in for 2022 by amending their benefits plan with their plan administrator.
6. Contribute the max to a Health Savings Account. HSAs allow pre-tax contributions, much like your pre-tax retirement savings. However, when used later for health-related expenses, including future long-term care expenses, the contributions and accumulation are tax-free upon withdrawal.
You may contribute to an HSA only if you have a High Deductible Health Plan (HDHP) that is 'HSA eligible' that only covers preventive services before the deductible. For 2022, the minimum deductible for an HDHP is $1,400 for an individual and $2,800 for a family.
7. Share your wealth through charitable giving. If you’re in search of a way to reduce your tax bill and give back to the community, there are many strategies that you can use to support charities that are important to you:
- Donor-Advised Funds allow you to donate cash or securities, which are non-refundable to a non-profit organization.
- A qualified charitable distribution, or QCD, allows you to distribute funds from your IRA to an eligible charity (a 501(c)(3) organization) as long as you’re 70 1/2 years of age or older. Since the gift will go directly to the charity, you can exclude the dollar amount of the gift from your taxable income of up to $100,000 each year. However, there are some exceptions, so it’s a good idea to consult a financial professional or tax advisor before pursuing this strategy.
- Real Estate: If you have a property you no longer need, you can donate it to charity.
- With a cash gift, you’ll receive a tax deduction equal to the amount of cash you donated minus the value of any products or services you received in return.
I can ensure you are maximizing your contributions and using these strategies to lower your taxable income for 2022 ahead of tax day. Remember that the deadline for contributions to many of these strategies is December 31, 2022, so contact me today.