When it comes to saving on your taxes, there are many long-term and short-term strategies you can use to reduce your next tax bill, and optimize your taxes for years to come.
While the best way to approach your tax-saving solution is to consult with a financial planner, it never hurts to be aware of the various tax credits and deductions available to you.
That’s why we’ve rounded up the top 22 strategies you can use to lower your tax bill in 2022 – and beyond.
22 Ways to Reduce Your 2022 Tax Bill
Whether you’re looking to lighten your tax bill for 2023 or implement long-term money-saving strategies, you’re sure to find these 22 nuggets of tax wisdom helpful in the process – let’s get started.
1. Maximize your IRA contribution
Did you know that traditional IRA contributions are counted as pre-tax dollars, and can lower your adjusted gross income (AGI) on your taxes?
If you’re looking to lower your tax bill for next year, this is a great way to do just that – while also saving for retirement. Just remember that there are limits as to how much you can invest in your retirement accounts each year. For 2022, the maximum contribution is $6,000 for those under the age of 50, and $7,000 for those above 50.
2. Increase contributions to your employer retirement plan (401k, 403b, 457)
Likewise, you can also contribute money to your employer-sponsored retirement accounts to lower your taxes for 2022.
The contribution limits for 401(k)s in 2022 are $20,500 for those under 50, and $27,000 for those over 50. Another benefit for people paying off student loans is that these contributions could also lower your income based repayment amounts.
3. Contribute to a 529
A 529 plan is a tax-advantaged account you can use to save for educational expenses, like college. Your contributions aren’t tax deductible on the federal level, but some state offer deductions and credits for contributing to their plans (Oregon for example). When you eventually take the money out to pay for tuition or textbooks, it’s totally tax-free – pretty sweet deal, right?
Although it’s primarily intended for college expenses, withdrawals from your 529 account can be used for anything education-related, including k-12 tuition or even college entrance exam fees. If you or your child are headed toward higher education, a 529 plan offers great tax-saving opportunities.
4. Make qualified charitable contributions from your IRA
If your Required Minimum Distribution (RMD) is more than you need and you are charitably minded you can always make qualified contributions to a charity of your choice.
Helping out a worthy cause and lowering your taxes? It’s a win-win all around – just make sure the check is made out directly to the charity from your IRA.
5. Donate appreciated stocks
Long-term holdings on capital gains are taxed up to 20% each year – which is no small beans. If you were to sell your stock and then donate the cash to charity, you’d be losing out on up to 20% of those funds.
The better way to go about your donation is to donate the stock directly to the charity – they get more moolah, you get lower taxes, and everyone comes out on top.
6. Tax-loss harvesting
Tax-loss harvesting is the practice of selling your investments at a loss to offset the capital gains taxes from other investment sales. It’s kind of complicated, and not necessarily a task you want to take on yourself.
Rather, it’s a great conversation to have with your financial advisor or tax planner. There are even robo-advising apps that offer tax-loss harvesting capabilities nowadays – it may be worth your while to explore your options and save a little extra on your tax bill next year.
7. Deduct business expenses
If you’re a small business owner, then you probably want to deduct business expenses from your personal spending. From office supplies to team lunches and even advertising costs, there are several items you can deduct next year.
The most important part of tax write-offs? The bookkeeping – keep all those receipts on hand!
8. Contribute to a Health Spending Account
Health Spending Accounts, or HSAs, allow you to invest your money for future medical expenses, totally tax-free. You can deduct your contributions from your taxable income, and as long as you spend withdrawals only on medical stuff, those are tax free as well!
Chances are you or your child will have medical expenses every once in a while, so this is a great way to save some money on those costs. Just keep in mind the annual contribution limits, which are $3,500 for individuals and $7,000 for families, with an extra $1,000 allowed for individuals aged 55 or older.
9. Use your a flexible spending account (FSA)
Similar to an HSA, a flexible spending account (FSA) can help you save money on your taxes and healthcare expenses. There are, however, a few key differences between the two account types:
- Self-employed individuals may qualify for an HSA, but not FSAs
- In addition to healthcare expenses, FSA funds may be used to cover childcare expenses
- You must declare how much you’d like your employer to deduct from your gross pay and contribute to your FSA each year
- FSAs cannot be used to cover health insurance premiums
A financial planner can help you decide whether an HSA, FSA, or some combination of the two account types would be best for you.
10. Itemize medical expenses
If there’s one tip you walk away with today, it should be this one: always itemize your medical expenses. Not only are hospitals known to “accidentally” overcharge you, and an itemized bill offers a failsafe against that, but itemized medical expenses can also save you on your taxes.
The IRS actually allows you to deduct some unreimbursed medical expenses, as long as they exceed 7.5% of your adjusted gross income. Talk with your financial planner to see if itemizing your medical expenses could save you big bucks.
11. Plan to pay for some of 2023’s deductible expenses before the end of December 2022
If you’re planning a big purchase that qualifies as a deduction around the new year, consider planning to click that “buy” button based on when you’d like to get the tax deduction.
For example, if you need a new work laptop and want to deduct it on your upcoming tax return, make sure to purchase it before December 31st – otherwise, you’ll have to wait until the year after to take the deduction.
12. Create a Donor-Advised Fund
A donor-advised fund, or DAF, is an account you can create to donate money to a public charity.
When you donate money to your DAF, you immediately receive a tax deduction, reducing your overall tax bill. The contribution limits are tied directly to your income, capping anywhere from 30-60% of your MAGI depending on the type of assets you choose to donate.
13. Invest in municipal bonds
Another great tip? Invest in municipal bonds. Municipal bonds are like loans you’re giving to your local, state, or federal government. There’s a set end date where you’ll be paid back, and bonds are considered a generally safe investment.
An added bonus? The interest payments you collect on municipal bonds are totally tax-free.
14. Invest in ETFs over mutual funds
Exchange-traded funds, also known as ETFs, are a type of investment you can use that are more tax-efficient than most mutual funds.
Although the IRS treats both investment types the same when you sell them, ETFs usually incur less taxable distributions.
15. Improve your home’s energy efficiency
As of 2021, the IRS actually offers tax incentives for homeowners that install energy-efficient equipment. Qualifying equipment includes solar panels, wind turbines, solar water heaters, and more.
If you’re looking to upgrade your home utilities anyway, why not grab the extra tax deduction along the way?
16. Send your kids to college (or go yourself!)
The IRS also offers two tax credits for those seeking higher education: the American opportunity tax credit and the lifelong learning credit.
The American opportunity credit gives students up to $2,500 in per eligible student, and is only available for the first four years the student is enrolled in college. The lifelong learning credit offers a maximum amount of $2,000 and has no cap on how many years it can be claimed. You can find more information on the different parameters and rules for eligibility surrounding these credits here.
17. Create a retirement plan for your small business (Simple, SEP or 401k)
If you own a small business, look into your options for creating a retirement plan for your employees, be that a Simple plan, and SEP, or even a 401(k).
These plans often come with a big tax credit for the business that can help offset costs. Employee benefits plus tax advantages come together to make this an enticing opportunity.
18. Deduct dependent care expenses
If you have children or other dependents, don’t forget to deduct care expenses. Childcare expenses could include a sitter, nanny, summer camp, daycare center, or any other care provider, and you could be looking at a deduction of upwards of $1,000 per child.
19. Defer bonuses/income to 2023
If you’re sitting close to the next income bracket and don’t want to be pushed over the limit, consider deferring your bonuses or even a portion of your income until the next year.
Work with your employer and financial planner to explore your options when it comes to collecting your income.
20. Make estimated tax payments to avoid underpayment penalties
You probably know that there are big penalties for underpaying on your taxes, so you’ll want to avoid that at all costs. If you don’t have taxes taken directly from your paycheck each pay period, you’ll probably want to make quarterly estimated tax payments.
This usually only applies to small business owners and freelancers. If you happen to overpay, you’ll get it back come tax return time. But if you underpay by more than 10%, you’ll probably be facing a fine.
21. Purchase an energy efficient (electric or plug in hybrid) vehicle
Looking to buy a new car? It may be worth your while to invest in an energy efficient vehicle. Not only are these cars better for the environment, but they also come with a nice tax credit.
If you’ve purchased an electric or plug-in hybrid vehicle any time after 2010, you may qualify to receive a federal tax credit worth up to $7,500. Eco- and wallet-friendly? It’s a slam dunk all around.
22. Invest in a Qualified Opportunity Zone
Another tax-advantageous opportunity you can invest in is a Qualified Opportunity Zone, or QOZ. These are economically distressed areas that need a bit of a financial boost – if you invest in them, you get a certain tax advantages.
You don’t have to live, work in, or even own anything in a QOZ to reap the benefits, either. To find more information on QOZs near you, click here.
And there you have it – 22 ways to reduce your tax bill in 2022 to help you save money both short-term and long-term.
Tackle your Taxes with Clarity
Want to learn more ways you can save on your taxes? We can help – click here to connect with a Clarity Wealth team member today.