- Take advantage of contributing to your workplace retirement account, this can reduce the taxes you pay now and your funds grow tax free.
- Donating cash or property to a qualified charity can help lower your taxes and clear out items you no longer need.
- Contributions to your Health Savings Accounts are tax-deductible, grow tax-free, and distributions used for qualified medical expenses are tax-free.
Here is how you can keep more of your hard-earned money.
You work hard for your money. Taxes are difficult to avoid, but there are many strategies to help protect your assets. By making some small changes to your financial plan, you can avoid paying unnecessary taxes. While tax season just ended, taking these steps now can help you avoid scrambling at the last minute and making mistakes. Here are three steps to lower your tax bill you should start taking now.
1. Max out your work retirement accounts
This is an obvious one, but surprisingly many do not take advantage of it. As opposed to waiting until the end of the year or the contribution deadline to contribute to your account, try contributing to your account on a monthly basis (dollar-cost averaging). This way, by the end of the year, you aren’t trying to find cash to max out your retirement accounts.
For 2022, the contribution limit for employees who participate in 401(k), 403(b), most 457 plans, and the federal government's Thrift Savings Plan is increased to $20,500. If you’re 50 years old or older, the limit is $27,000. Limits on contributions to traditional and Roth IRAs remain unchanged at $6,000 ($7,000 if you’re 50 or older).
2. Make charitable donations
If you itemize on your tax returns, take time throughout the year to donate to your favorite charities. Make sure the recipient organization qualifies for tax-exempt status by the IRS. You can deduct charitable contributions of money or property. Typically, you can deduct up to 50% of your adjusted gross income, but 20% and 30% limitations apply in some cases.
It may be a good idea to clean out your storage unit, closet, or basement for items you no longer need and donate them to places such as Goodwill, the Salvation Army, or your church. If you donate property you can deduct the fair market value of the property. You can’t receive a tax deduction for donating services to a charity. But you may be able to deduct expenses related to the donation, like travel or materials.
3. Use a health savings account
With healthcare costs continuing to skyrocket, employees with a high-deductible health insurance plan can use a health savings account (HSA) to help lower their taxes. Just like a 401(k), HSA contributions (which may be matched by the employer) are 100% tax-deductible. You can claim this deduction even if you don’t itemize.
For 2022, the maximum for individuals is $3,650 and $7,300 for families. If you are over 55, you can contribute an additional $1,000 catch-up contribution. Similar to a retirement account, the funds grow in the HSA tax-free. Another tax benefit of an HSA is that any withdrawals used for qualified medical expenses are not taxed.
The average taxpayer spends 13 hours preparing a tax return. This number can vary widely based on the complexity of your personal financial situation. Many people make common tax mistakes because they wait until the last minute. In addition, by using these strategies now, you give yourself more flexibility and do not have to come up with a large chunk of cash at the deadline to take advantage of these strategies.
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