According to a recent study, published in the New York Post, “57% of Americans are not confident about their understanding of the tax code.” As a result, if you’re feeling overwhelmed, you aren’t alone. However, there are plenty of steps you can take to save as much money as possible on your tax returns.
In this article, we’ll share some fantastic year-end tax tips that you can use to better manage your finances.
Deferring income gives you the opportunity to pay tax on some of your earnings the following tax year - not the current one. This is a logistical move for those who may be moving into a lower tax bracket in 2023, as you’ll be taxed according to this and not your current tax bracket. This means it can be a great way to cut down on the amount of tax you have to pay. As such, if you’re expecting to earn more money next year, deferring will only mean you pay more taxes, meaning it's better to pay sooner rather than later.
There are many ways in which you could defer income. As a salaried employee, you could request that any year-end bonuses are delayed until the following year. If you’re a freelancer, you can defer income by delaying the collection of fees.
Make the most of tax deductions.
Making use of the tax deductions available to you can also make it easier to manage your tax payments. There are various different deductions you can take, such as student loan interest, medical and dental expenses and relevant state taxes. If you apply these deductions before the end of 2022, you’ll have to pay less tax when the financial year comes to a close.
Contribute to your retirement funds.
Contributing to your 401k can also reduce your taxable income for the year. As a result, it's beneficial to contribute as much as you can to your 401k or similar retirement plan before the year is out. This varies year on year, but for 2022, the annual limit for those below the age of 50 is $20,500, and $27,000 for those over 50. This is an increase of around $1,000 from 2021.
If you cannot afford to cover the maximum contribution fee, try to set aside as much as you can. Remember, the more you save now, the better prepared you are for your future (and the more fun you can have during your retirement).
Donate to charity.
Donating to charity can also provide you with the opportunity to reduce your taxable income. However, it's important that you deduct these donations appropriately, by itemizing your deductions. According to the IRS, when it comes to charity ale donations “you may deduct up to 50% of your adjusted gross income, but 20% and 30% limitations apply in some cases.”
In the 2021 tax year, people were able to deduct these donations from charities without having to itemize their deductions - but this is no longer possible in 2022.
Try loss harvesting.
Loss harvesting is a process where you sell investments such as stocks and mutual funds in or to realize losses. You then “use that loss to reduce your taxable capital gains and potential offset up to $3,000 of your ordinary income”. This can be a great way to better manage your investment portfolio. However, you must ensure you do plenty of research ahead of time to ensure you understand the changes you are making to your investment portfolio.
Take required minimum distributions.
Per regulations, you must begin withdrawing money from your retirement accounts by the end of the year after turning 72. This is known as your “Required Minimum Distribution”, and was instigated to stop people from using retirement counts to avoid paying their taxes. RMDs were waived in 2021, but are back in place in 2022, and failing to do them results in a financial penalty. In fact, you could be fined 50% of the amount that you were supposed to distribute.
While you may not have to file your taxes together until the end of the year, the sooner you get started, the better. This will ensure that you have everything you need in order when the time comes, minimizing the chances of you encountering any problems that could land you in a difficult situation, or result in you paying more taxes than is strictly necessary.