3 Moves You Can Make Today to Save Money on Your Taxes Next Year
KEY POINTS
- You shouldn't pay the IRS more than you have to.
- Some of the moves you make this year could set you up with a lower tax bill come 2023.
Here's what you can do to pay the IRS less.
At this point, the 2022 tax-filing season is nothing but a memory for many filers. But if you're the type of person who tends to think about taxes a lot, then you may already be dreading the 2023 filing season. This especially applies if you tend to owe the IRS money.
The good news, though, is that you're not doomed to have to write a large check next year. If you make these moves sooner rather than later, you can set yourself up to pay less in taxes to the IRS in 2023 -- without breaking the law in any shape or form.
1. Max out your IRA contributions
An IRA lets you save money for retirement in a tax-advantaged manner. Now there are two main types of IRA you can open -- a traditional IRA and a Roth IRA.
A Roth IRA won't give you an immediate tax break on the money you put in. But a traditional IRA will. And so if you max out a traditional IRA this year, you'll shield some of your earnings from taxes.
Currently, you can contribute up to $6,000 a year to an IRA (whether it's a traditional or a Roth) if you're under the age of 50. If you're 50 or older, that limit rises to $7,000.
If you're 45 and contribute this year's max, it means the IRS won't be able to tax you on $6,000 of earnings. The result? A lower bill come tax time.
2. Wait at least a year and a day before selling investments in a brokerage account
When you sell investments at a profit in an IRA, you're not taxed on that money immediately. Rather, gains are tax-deferred with a traditional IRA, and you don't have to worry about taxes on them until you start taking withdrawals from your account. (With a Roth IRA, investment gains are tax-free.)
But if you sell investments at a profit in a regular brokerage account, you will have to pay taxes on those gains sooner rather than later. In fact, if you lock in gains in your brokerage account this year, you'll have to pay up when you file your 2022 tax return in 2023.
That's why it's important to make sure you hold your investments for at least a year and a day before selling them at a profit. If you go that route, it'll count as long-term capital gains, which are taxed at a much lower rate than short-term capital gains. Short-term capital gains are those that apply to investments you hold for a year or less before selling.
3. Buy a home
Clearly, you can't just snap your fingers and become a homeowner overnight. But if you've been saving for a home purchase and manage to ramp up your search, you could benefit tax-wise.
There are different tax breaks you can enjoy as a homeowner, and a big one is the option to deduct the interest you pay on your mortgage (to be clear, though, that doesn't mean your entire mortgage payment is tax-deductible). You can also deduct the property taxes you have to pay, though depending on what those amount to and what your local income taxes look like, you may only be able to deduct a portion of your property tax bill (and some homeowners can't benefit from this deduction at all).
Nobody likes to pay more taxes than necessary. If you can make these moves soon, you can set yourself up to be a much happier person when the time comes to file your 2022 return next year.
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