As always, I seem to owe a bit extra each year (that’s by design) when doing my taxes. This annual ritual has me thinking about which strategies might help me shave off tax dollars now and next year. Here are a few strategies that come to mind.
Contribute more to your retirement plan at work
Regardless of how Congress tweaks the tax code, there is a critical tool in most of our tax toolboxes. This tool is the ability to shelter some current earnings from income taxes. You can do this by making pre-tax contributions to a retirement plan at work (401k, 403b, etc.). Contribution limits increased to $22,500 per year in 2023. Annual catch-up contributions for workers aged 50+ are $7,500. Contribute at least as much as your employer will match. Aspire to increase your contribution rate to 10% or more of earnings over time.
Remember, if your goal is to minimize taxes NOW, make sure you select the pre-tax option and not the Roth.
Maximize your health savings account (HSA) contributions
An often-overlooked last-minute tax-saving strategy is to make more HSA contributions for the previous tax year. You have until April 15th to make the contributions. First, however, you must have been covered by a high-deductible health insurance plan during the year to qualify. Then, if you didn’t contribute the maximum, you may have some extra tax savings available. The maximum for 2022 is $3,650 for individuals or $7,300 for family coverage. The maximum for 2023 is $3,850 for individuals or $7,750 for family coverage. There is a catch-up contribution of $1,000 for those aged 55+.
Be sure to notify your HSA provider that you want them to code your contribution for the 2022 tax year. The IRS will include your contributions as an adjustment to gross income on your tax return. This works to lower your taxes for that year.
Make deductible contributions to a traditional IRA
This option is available if you are working but not covered by a qualified plan at work (e.g., 401k or 403b), or if you are participating in a plan and have income below certain limits.
If you don’t have a retirement plan through work or do but meet the income limits, you can deduct your contributions to a traditional IRA, and investments can grow tax-deferred until withdrawn.
Itemize & maximize deductions (if you still can)
Under current tax law, you may find it is just not worth it to itemize deductions. Thanks to recent tax reforms, the standard deduction amount has increased for everyone. The deduction is $12,950 for single filers ($13,850 in 2023) and $25,900 ($27,700 in 2023) for married couples filing joint returns.
Home mortgage interest has traditionally been a huge deduction for itemizers. You can deduct home mortgage interest on up to $750,000 of mortgage loans ($375,000 if married filing separately). You can’t deduct interest for home equity loans unless you used the money to remodel or improve your home.
If your itemized deductions are close to the standard deduction amount, itemizing might be better if you make charitable contributions. Some taxpayers are electing to “bundle” their deductions by pushing them to the next tax year. This way they can have larger amounts of itemized deductions every other year and take the standard deduction in-between years.
Make the most of flexible spending accounts (FSAs) for child and healthcare
A Dependent Care FSA (DCFSA) is a pre-tax savings account where you automatically deduct money from each paycheck BEFORE TAX. This gives you a pot of tax-free cash you can use to pay for childcare expenses during the year. Under current IRS rules, you can set aside $5,000 each year, regardless of how many children you have.
Similarly, if you anticipate having regular or one-time healthcare expenses, why not use some tax-free cash for those, too? Healthcare flexible spending account limits increased to $3,050 in 2023. The same contribution is applicable to limited-purpose FSAs restricted to dental and vision care services. You can use this along with health savings accounts (HSAs) tied to high-deductible health insurance plans.
Update your personal spending plan (a.k.a., “The Budget”)
I know; it seems like every financial topic is a reason to talk about budgets. Then again, staying informed and aware of your current and future spending plans will help you identify which dollars might represent additional tax savings. Specifying precisely how much you can afford to redirect to tax advantaged strategies will help you adapt to those pesky tax law changes and maybe even enjoy a few more dollars in your pocket.