Even after years of filing taxes, most investors find it disheartening to see a large portion of their income go to the IRS. While paying taxes may seem inevitable, there are strategies that you can use to reduce your tax burden and keep more of your money.
Most methods for reducing taxable income must be implemented by the end of the tax year. However, there are still a few last-minute strategies that you can use to reduce your 2022 taxable income before the April 18 filing deadline.
Reduce Your Taxable Income by Contributing to a Traditional IRA
Contributing to a Traditional IRA can help you reduce your prior year taxes and retain control over your funds. You can make Traditional IRA contributions for the 2022 tax year up until the filing deadline—April 18, 2023.
Traditional IRAs can be a good choice for investors who are in a high tax bracket now but expect to be in a lower tax bracket during retirement. That is because Traditional IRAs defer income tax liability. When you contribute to a Traditional IRA, you may be eligible to deduct your contribution from your income tax. However, you will eventually have to pay tax on the contribution amount and investment growth. For most investors, these taxes are paid during retirement when they begin taking distributions from retirement accounts to supplement their income.
The maximum contribution to all IRAs for tax year 2022 is $6,000, and if you’re age 50 or older you may be able to contribute an additional $1,000 as a catch-up contribution. However, the deductibility of your contributions is based on your filing status, employer retirement benefits, and Modified Adjusted Gross Income [MAGI].
If your employer does not offer a retirement plan, you are likely eligible to deduct your contributions to a Traditional IRA. On the other hand, if you or your spouse are covered by an employer retirement plan, the amount you can deduct becomes more complicated. To determine if you can deduct your contributions, see the tables below and speak to your financial advisor.
Reduce Your Taxable Income by Contributing to a Health Savings Account
Health Savings Accounts [HSA]s are available to individuals and families with high-deductible health insurance plans. A high-deductible insurance plan is defined as any plan with a deductible of at least $1,400 for an individual or $2,800 for a family. These plans allow for tax-deductible contributions to an HSA that can be used to pay for qualified medical expenses.
If you had a high-deductible health insurance plan in 2022, you could contribute to an HSA until April 15, 2023. The maximum contribution amount is $3,650 for an individual and $7,300 for a family. Those over age 55 can contribute an additional $1,000 per year.
HSAs can be an attractive option for investors, particularly those in high income tax brackets. This is because HSA funds are never taxed if they are used to cover qualified medical expenses. Additionally, funds in an HSA do not expire and can be rolled over from year to year.
To qualify for an HSA, your high-deductible health care plan must be your only health insurance. In other words, you cannot be covered by another insurance plan, like Medicare. In addition, to contribute the maximum amount to your HSA, you must have been covered by the high-deductible plan every month of the year. For example, if you switched to a high-deductible insurance plan halfway through 2022, you would only be eligible to contribute half of the maximum amount. Your financial advisor can help you determine if you are eligible to contribute.
Account For Uncommon Tax Deductions
When you are filing your taxes, there are many deductions and credits that can lower your tax burden. Some of these are more well-known than others. If any of the following less-common deductions apply in your situation, be sure to account for them when filing your taxes.
Medical Expenses
If you itemize deductions, you may be able to reduce your taxable income if you had significant medical expenses last year. For 2022, you can deduct medical expenses that exceed 7.5% of your Adjusted Gross Income [AGI].
529 Contributions
If you contributed to a 529 educational account last year, make sure that your contributions are included in your 2022 state taxes. There is no federal deduction for 529 contributions, but many states, including Alabama, offer deductions.
Energy Efficiency Credits
If you made home improvements last year, you may be able to claim these costs under the Residential Energy Efficiency Property Credit or the Energy Efficient Home Improvement Credit. Your eligibility for these credits is based on the type of improvements that you made, so speak to your tax advisor to see if these credits apply to you.
Charitable Contributions
If you itemize, you may also be eligible to deduct donations to qualifying charities. The amount you can deduct will depend on the type of charity and type of donation you made, among other factors.
You may qualify for other tax deductions and credits that can help to reduce your tax burden. So, speak with a tax professional to review all the credits you may be able to use. In addition, an experienced financial advisor can help you plan for the impact of taxes going forward and work with you to put a plan in place to minimize your tax burden each year.
Speak With the Tax, Legal, and Financial Professionals at Meld Financial
If you are looking for ways to reduce your taxable income, Meld Financial can help. Our team of tax, legal, and financial professionals can help you minimize your tax liability each year and plan for future taxes as a part of your financial plan.
Our comprehensive wealth management plan, Financial Fingerprint™ is quick to assemble, easy to understand, and simple to modify as your circumstances change. Best of all, Financial Fingerprint™, accounts for your tax situation now and during retirement. To get started, contact us today.
