It's never too early to plan for next year's taxes, so here are some helpful steps you can take now to better position yourself to pay less when you file next year.
Adjust Your Withholding
- Ideally, you want the right amount of withholding — not too much and not too little. Too little withholding can lead to a large unexpected tax bill at the end year. Too much can present an opportunity cost. That is, you're forgoing the opportunity to invest and get returns on that money. If you'd like to have more money to invest during the year, you might consider looking at your last year's taxes and adjusting your withholding if you paid too much. You can use this IRS tax withholding estimator to complete a new W-4 form, then submit it to your payroll department to request an adjustment in the amount of taxes withheld from your paycheck for the rest of this calendar year.
- If you're self-employed, you probably are already making your own estimated tax payments throughout the year. You can get help from us or use the worksheets included with IRS Form 1040-ES, "Estimated Tax for Individuals," to calculate your estimated quarterly payment amount to ensure you're not paying too little or too much.
Contribute to a Retirement Account
- If you have a 401k, max it out! If you don't have an employer-sponsored 401k, then consider contributing up to $6,000 to a traditional IRA ($7,000 if you're 50 or older).
- This is one of the best ways to save for retirement. You can deduct 401(k) contributions on your federal income tax return, and the money can grow tax-free until retirement. That means you won't owe capital gains taxes on the account's investment returns, dividends, or interest.
- For a traditional IRA, your income level will determine whether you can take a deduction on what you contribute. (Come and talk to us about other options if your income is too high to meet the criteria required for a deduction for a traditional IRA.)
Don't Forget about Charitable Contributions
- If you itemize, charitable contributions are another way to reduce your tax burden. You can deduct between 60% to 20% of your adjusted gross income for a contribution of cash or property to a qualified charity for 2022 — if you itemize. Many people don't itemize but instead take the standard deduction. We can help you look at your financial picture as a whole to determine if it might be more advantageous for you to itemize.
- If you're going to take advantage of the charitable contributions deduction, you must make your donation before the end of 2022, and you must have proof of the donation (an acknowledgement from the organization will do).
Take Credit for Having A Child
- If you have a child, the child tax credit is worth up to $2,000 per dependent child under the age of 17 at the end of 2022. This credit is phased out for taxpayers with higher incomes.
- A second credit, the child and dependent care credit can help offset the cost of care for a child under the age of 13 or a spouse or dependents not able to care for themselves while you're looking for work or are working. Check with us if you have questions about your eligibility.
Help Pay for College
- The American Opportunity Tax Credit is a great tax benefit for the parents of college-bound students. You can claim up to $2,500 per eligible student in tuition and fees (including books). Your adjusted gross income has to be under $180,000 if you're single and under $90,000 if you're married and filing jointly.
- The lifetime learning credit is worth up to $2,000 per return. It can be used for undergraduate, graduate, and professional courses, even if you're not pursuing a degree. To take advantage of this credit, your modified adjusted gross income must be $80,000 or less ($160,000 or less if married and filing a joint return).
Open a Health Savings Account if You're Eligible
- You are eligible and can contribute to a health savings account (HSA) if you have a high-deductible health care plan. A HSA is a tax-advantaged savings account that lets you set aside money to pay for qualified medical expenses.
- HSAs offer triple tax benefits: First, contributions to a HSA lower your taxable income. Second, you don't have to pay taxes on any investment returns in the account. Third, as long as you use the money in the account to pay for qualified medical expenses, withdrawals are tax-free.
- For 2022, you can contribute up to $3,650 to a HSA that covers only you, or $7,300 to a family plan.
- If you don't have a high-deductible health care plan, find out if your employer offers a flexible spending account (FSA). A health care FSA lets you pay for many out-of-pocket medical, dental, and vision expenses using pretax dollars.
Tax filing time may not be until next April, but it's never too early to start planning for next year. If you have questions about the above, we urge you to come and discuss them with us these as well as other steps you can take now to reduce your tax liability when you file next year.
Need advice about tax planning? We're here to help you with your individual tax filing and advisory services. Contact us today. Our experienced team of professionals led by Charles Myrick, CPA, will provide you with savvy, expert advice on reducing your tax bill while maximizing your investments, minimizing risk, and meeting your financial goals.