3 Ideas To Help You Pay Less In Taxes
January 24, 2022When it comes to tax strategies, sooner is better than later.
Disclaimer: Consult with a tax professional before taking action.
Let’s take a look at three easy tax strategies that might save you substantial amounts of money come tax time.
Give your paycheck a checkup
It is always a good time to double-check your W-4 withholding elections. However, checking as early as possible will help you plan the year better. You want to make sure you aren’t paying too little in taxes along the way or paying too much. The idea is to find a balance so you won’t owe the IRS penalties OR pay too much. That would be like giving the government an interest-free loan!
Fortunately, there are two free tools available online to help you calculate how much to withhold. Gather copies of your pay stubs and last year’s tax return. You will need information from these documents to use the IRS withholding calculator or the TurboTax W-4 calculator. Both of these tools will help you see how many withholding elections to select on your W-4.
Max out your traditional retirement plan contributions
This tried-and-true method of lowering your tax bill still works just fine. The more you contribute to a traditional (not Roth) retirement plan at work, the less taxable income you will have with every paycheck. The new annual contribution limit for 2023 is $22,500 for 401(k) and similar plans.
Older workers (ages 50+) can save up to $7,500 each year with an additional IRA catch-up contribution of $1,000. Another strategy is to contribute to your HSA if you are signed up for a health insurance plan that’s eligible.
Get your deductions in a bunch
Itemizing your tax deductions might no longer be your best strategy. The standard deduction is now practically double what it was before the most recent tax reform. There are also new limits on home equity loan deductions, miscellaneous itemized deductions, and other changes. Then again, it might be a good strategy if you are able to bunch your deductions.
How does this strategy work? The idea is to time certain deductible expenses so you squeeze more of them into a single year (e.g., estimated state income taxes, property taxes, medical bills, etc.). If the bunched deductions are larger than your revised, larger standard deduction, then bunch up your deductions and itemize. This might mean on alternate years you take the standard deduction one year and itemize the next. Lather, rinse, repeat.
There you have it. Three relatively easy ways to save money on taxes for the new year. Your tax professional may have other recommendations as well. Give him or her a call.