The best method to reduce your liability and maximize your tax refund is to review your financial condition at the end of each year.
Using these tax tactics can significantly lessen your tax burden, but time is of the essence. There are less than two months left in 2022 for you to take the necessary steps to improve your tax status, and doing so will require some advanced planning and organization.
1. Check Your Paycheck
Employers in the United States use a pay-as-you-go system to deduct money from your paycheck, while self-employed people must make quarterly scheduled tax refund. A penalty may be imposed at tax time for failure to make adequate tax payments throughout the year.
The pay-as-you-go system used by American employers to withhold money from your salary contrasts with the requirement for self-employed individuals to make quarterly scheduled tax payments. Failure to make sufficient tax refund payments throughout the year may result in a penalty being assessed at tax time.
2. Offset Capital Gains
With limited price increases from companies, the S&P 500 index will be down by more than 20% in 2022. The stock market has had a rough year. The possibility of stock losses during a down market creates a favorable environment for tax loss harvesting.
To offset any potential capital gains, the tax approach involves recognizing losses or selling stocks and other assets that have depreciated in value. A capital gain is any increase in wealth attained by the disposition of capital assets such as stocks, real estate, vehicles, and furnishings.
Only through the sale of assets can losses be realized and profits countered.
3. Maximize Contributions
Tax deductions from retirement funds, such as 401(k)s and IRAs, are among the most valuable since they help you save for the future while reducing your taxable income. Before the end of the year, put as much money as possible into a retirement account.
Employer contributions are excluded from the $20,500 401(k) deduction cap for 2022 tax purposes. Only by saving aside money for the future might a worker in the 24 percent tax bracket cut their taxable income by more than $5,000.
To maximize your prospective retirement deductions for the final pay period of 2022, increase the percentage of your regular 401(k) contribution.
4. Defer Year-End Bonuses And Payments
It’s not always easy, but if you get a bonus towards the end of the year and want to minimize your taxable income this year, consider asking your company to delay payment until January.
Similarly, if you’re a freelancer or contractor who wants to reduce your taxable income for 2022, consider waiting to send out invoices until January.
Since you’ll still have to pay income taxes on that sum in 2023, you’ll want to decide whether this or next year is better for making it.
Read more: Tax Rebate 2023: Which states will continue sending refunds next year?
5. Check Minimum Distributions
For those who turn seventy-one before December 31, 2019, the SECURE Act of 2019 increased the eligibility age to seventy-two. US tax law requires that citizens begin receiving distributions from their personal or employer-sponsored retirement savings accounts once they reach a certain age.
These payouts are obligatory for retirement accounts like 401(k)s, traditional IRAs, profit sharing, and pensions. This is because they are unnecessary so long as the Roth IRA owner is still alive.
RMDs are determined by totaling the funds in your retirement accounts and multiplying the result by an IRS life expectancy calculation.
6. Combine Medical Expenses
Medical expenses can be a significant tax deduction for many taxpayers, but the IRS only allows you to deduct expenses that exceed 7.5% of your AGI. For instance, you can deduct $1,250 from your taxable income, $5,000 – $50,000 x 7.5%, if your AGI is $50,000 and you spent $5,000 in medical expenses.
It may be advantageous to consolidate all of your high medical costs into a single year for this reason. These expenditures may cover things like procedures, routine maintenance, hospital stays, dental work, prescription medication, eyeglasses, hearing aids, and therapy for mental health issues, as well as travel to and from the providers.
7. Strategize Business Expenses
If you’re self-employed or a freelancer, writing off your business expenses can result in significant tax savings. You can think about prepaying for next year’s expenses before the end of 2022 in order to lessen your tax burden, depending on how much you’ve already spent on your professional work this year.
It’s crucial to remember that every person’s tax position is unique. Although this year-end tax advice may be useful for you, there is no one size fits all method for tax refund. Before making any significant tax decisions, make sure to seek the advice of a tax expert.
Read more: Tax Rebate 2023: Which states will continue sending refunds next year?
