Will you need to do any last-minute shopping this holiday season? I do! If you need last-minute tax strategies, we have those for you.
Below are five last-minute strategies that could reduce your 2022 tax bill; these are ideas that could reduce your tax bill or increase your tax return.
DISCLAIMER – Before you read our article about strategies to help you save money and potential tax-related headaches, my compliance team wants you to know that I’m not an accountant. Discuss any strategies and questions about these ideas with your accountant or tax professional.
Make a Tax-Deductible Contribution to a Traditional IRA or SEP IRA Contributions
One way to lower your tax bill is to make a tax-deductible contribution to a retirement account such as a Traditional IRA or a SEP IRA (if you’re a business owner).
Traditional IRA – The maximum contribution for traditional IRA accounts in 2022 is $6,000 per person and $7,000 if you are over age 50. You can make contributions through the deadline (April 15, 2023).
For your contribution to be deductible, you must meet the IRS requirements. This deduction is allowed in full if you are not covered by a work plan.
You may not be eligible to deduct your contribution if you (or your spouse if married) are covered by a plan at work. Click here to see if you may qualify for an IRA deduction.
SEP IRA – Business owners can contribute to a SEP IRA by the tax deadline (April 15, 2023) or as late as 10/15/2023 if they file an extension. This can help if you don’t have the cash now to contribute or if you will have the funds available to contribute by the deadline.
Increase the Amount You are Saving into Your Company-Sponsored Retirement Plan (e.g., 401(k), 403(b), SIMPLE IRA, 401(a), etc.)
You likely have one last paycheck for the year. If you were in the 32% tax bracket, you could reduce your tax bill by $320 if you put away $1,000 of your last paycheck into your company retirement plan. Review the upcoming changes to tax brackets here.
Unless you live in one of the eight states that don’t hit you with income tax, this strategy can also reduce your state tax bill.
If you have not maxed out your company plan contributions ($20,500 for a 401k or 403b) or the catch-up contribution ($6,500 if over 50) this year, there could still be time to adjust your last paycheck of the year!
Make a Charitable Contribution
If you care about a charity and have some extra cash or investments you do not need for retirement, this strategy can help you lower your tax bill while helping others. One downfall of this strategy is that it will not reduce your tax bill if you take the standard deduction.
If you will take the standard deduction in 2022 and itemize in 2023, you could be better off delaying your charitable contribution until January (or anytime) in 2023.
Do the terms “itemize” or “standard deduction” make your head hurt? Learn more about what they mean in this article, or talk to your accountant to determine how you should file your taxes for 2022.
Instead of giving cash, you could gift stock or appreciated assets. Do you have stock or appreciated assets that you don’t need? Are you ahead of schedule to fund the goals in your financial plan (e.g., retirement, college, etc.)? If so, gifting appreciated assets could be another way to reduce your tax bill. This article contains more information about gifting appreciated stock.
Manage Education Bills or Contribute to a 529 Savings Plan
You may be able to reduce your tax burden by prepaying tuition or contributing to a 529 education account. The American Opportunity Tax Credit provides parents with a $2,500 tax credit for each qualifying student they help with tuition. The student must be in the first four years of undergraduate study to qualify.
With the spring semester coming soon, prepaying tuition before the end of the year could be worthwhile. It’s important to note that married couples with modified adjusted joint income of under $160,000 can claim the full amount, while those with up to $180,000 can only claim a partial amount. (Source)
While contributing to a 529 may not help you reduce your federal tax bill, it can help lower your state tax bill. Some states allow you to deduct 529 contributions if you contribute to your home state’s 529 plan. Other states will even allow you to deduct contributions to any state’s 529 plan. You can learn more about your home state’s 529 plan by clicking here and selecting your home state.
Make a Roth Conversion
A Roth IRA conversion involves transferring retirement funds from a traditional IRA or 401(k) into a Roth account, which could provide you with more tax-free income in the future.
Roth IRA conversions could make sense for a number of reasons, including if you expect your future tax rate to be higher than it is today.
What’s the catch? When you make a Roth conversion, you may have to pay taxes at the time of conversion (unless you have all after-tax money in an IRA account that doesn’t have earnings).
Ripping the tax band-aid off (and paying taxes at the time of conversion) might not be a bad strategy in some scenarios. For example, suppose you pay taxes today on your conversion because you’re in a low-income bracket due to the COVID-19 pandemic (or for other reasons) and take your money out of your Roth IRA in the future (when you’re in a higher bracket). In that case, a Roth conversion could benefit you.
Having more money in a Roth IRA means you or your heirs could have more access to tax-free money in the future. Talk to your accountant if you need to run scenarios and determine if a Roth conversion could benefit you, especially if your household income is down this year.
For more in-depth information on how a Roth IRA could help you lower your lifetime tax bill, click here. Click here to learn four different ways to do a Roth conversion and click here to learn how to take tax-free and penalty-free withdrawals from Roth IRA accounts.
If you are worried you might be overpaying on your taxes or wondering whether you might be missing opportunities to reduce your tax bill, I encourage you to take our Tax Minimization Assessment. It helps you explore options to lower your tax bill and keep more of your hard-earned money so that you have more for what matters to you.
Life is too short to worry about money! Learn more about how we can help by scheduling a complimentary consultation.