Taxes are a fact of life. And once the calendar changes from the current year to the next, you lose the opportunity to make certain tax moves that could lower your tax bill.
Consider using these clever tax moves you can make today to help optimize your finances. Don’t delay, as some opportunities could expire when the calendar hits January 1.
Make some clever money moves:
Contribute more to a 401(k)
If your employer offers a traditional 401(k) account that you don’t max out, you’re leaving potential tax savings on the table. Traditional 401(k) contributions are made on a pre-tax basis. This lowers your taxable income reported on your W-2, which is used to calculate the tax you owe.
The maximum employee contribution to a 401(k) in 2021 is $19,500. People age 50 or older can contribute a total of $26,000. In 2022, you can contribute up to $20,500 if you're under 50, or $27,000 if you're 50 or older.
Open and contribute to an IRA
A traditional IRA is a tax-advantaged retirement account that may help you save money on your taxes. Contributions to these accounts may be tax-deductible depending on your circumstances.
Contributions are limited to $6,000 in 2021 and 2022 or $7,000 if you’re age 50 or older. Contributions must be made by April 18th, 2022, to potentially qualify for a tax deduction in 2021.
If a workplace retirement plan does not cover you and your spouse, all traditional IRA contributions are typically deductible. If a workplace retirement plan covers you or a spouse, some or all of your contributions may not be tax-deductible depending on your modified adjusted gross income.
Max out your HSA
A health savings account (HSA) is another type of tax-advantaged account that could save you money on your taxes. Contributions to this account type may be made pre-tax or may be tax-deductible.
To open and contribute to this type of account, you must have a qualifying high deductible health plan (HDHP). HDHPs must have a deductible of $1,400 to $7,000 for individual coverage, or $2,800 to $14,000 for family coverage. Single health plan holders can contribute up to $3,600, and family health plan holders can contribute up to $7,200 in 2021.
The deductibles remain the same this year, but the maximum contribution for single health plan holders increased to $3,650 and family health plan holders can contribute up to $7,300 in 2022.
Sell investments at a loss
The tax code allows you to offset any capital gains you have against capital losses. Capital gains and losses occur when you sell capital assets, such as stocks or mutual funds. A capital loss can directly reduce your taxable income if you have capital gains.
However, the tax code takes things one step further and allows you to deduct up to $3,000 of capital losses above any capital gains you have. This provides an opportunity to lower your tax bill if you have an investment you want to sell that’s worth less than you bought it for.
Contribute to a qualified charity
You can deduct select contributions to qualifying charities on your 2021 tax return. You may deduct up to $600 in cash contributions to qualifying organizations if you take the standard deduction.
People who itemize their deductions cannot take the deduction mentioned above. However, they can deduct qualified cash contributions as an itemized deduction, up to 100% of their annual gross income (AGI). This 100% of AGI limit is higher than the 20% to 60% AGI limit that usually applies to this deduction. An itemized deduction exists for donating property to qualifying charitable organizations, as well.
Pay your January mortgage payment in December
Careful planning can help you maximize other itemized deductions, too. One common itemized deduction many homeowners take is the mortgage interest deduction. If you pay your January mortgage payment in December, the interest payment made as part of that payment is deductible in the current year.
However, this is only beneficial if you itemize deductions. If you take the standard deduction, you get no benefit. Additionally, accelerating a January mortgage payment into December can only be done once.
Next year, you’ll have to do this again if you want 12 months of mortgage interest payments you can deduct on your tax return. If you do not accelerate your January payment next year, you’ll only have 11 months of deductible mortgage interest on your next year's tax return.
Make state and local tax payments in December
If you live in a state that has a state income tax or other state and local taxes, you could benefit from accelerating this itemized deduction. Unfortunately, those taking the standard deduction won’t benefit at all from this idea. People who have already paid over $10,000 in qualifying state and local taxes won’t benefit either.
That said, people that have paid less than $10,000 in qualifying state and local taxes in the current year may want to make payments before the end of the year for upcoming payments due. Total qualifying state and local tax payments up to $10,000 may help reduce your taxable income, resulting in less federal income tax owed with your return. Keep in mind that any accelerated amounts paid won’t be able to be deducted from next year’s tax return.
Accelerate business expenses
Business owners have a unique opportunity to lower their personal income tax bills. If your business taxes flow through to your personal tax return, accelerating expenses by paying for them in late 2022 instead of early 2023 may help you reduce your taxable income. This strategy should work for cash basis Schedule C companies, partnerships, and S corporations.
Delay business income
A similar opportunity exists for the same business owners to reduce their taxable income further in 2022. If possible, cash basis business owners can attempt to delay income into early 2023, rather than receiving it in late 2022. Work with your customers and other income sources to delay receiving payments into next year. You may do this by invoicing later than usual or speaking with companies directly and asking for cooperation.
These tax moves may help you pay fewer taxes when you fill out your yearly tax return. Keep in mind, you should only consider these ideas if they make sense for your financial and tax situation. Consult a financial advisor and tax advisor to learn more about how these tax moves could impact you.
If you’re looking for other ways to improve your finances, consider these paycheck budget moves or even save some extra money with these Amazon shopping hacks. You can get a head start on the next tax season by making sure you keep track of any taxable events in a single place. This way, you have an easy way to get started next tax season.