As the end of the year approaches, the window is closing on measures that can save you money on your taxes. A seasoned tax professional can provide further guidance on the ways that you can save on your 2022 tax bill. The following are some last-minute tax-saving tips for reducing your 2022 taxes. But time is of the essence!
Tax-Saving Measure #1: Prepay!
This section relates to prepaying 2023 expenses in 2022. While affordability may be an issue for these tax-saving measures, a tax professional can tell you how to make prepaying expenses more affordable and answer your questions.
Prepay 2023 Property Taxes in 2022
If you itemize deductions instead of using the standard deduction amount, the IRS allows you to deduct up to $10,000 in state and local taxes. If you are still below the $10,000 deduction threshold, you can pay your property tax bill that is due in January 2023, ahead of time in December 2022. This will allow you to deduct the amount from your 2022 taxes.
Prepay Your Child’s 2023 College Tuition in 2022
You can also prepay your child’s 2023 first-quarter tuition. This is available even if you don’t itemize your deductions. If your child is a student in his or her first four years of undergraduate study, you can deduct up to $2,500 of the tuition paid.
Prepay Your 2023 Personal Educational Expenses in 2022
You can prepay school expenses for yourself using the Lifetime Learning Credit when calculating your 2022 tax bill. This credit allows you to take up to 20% of out-of-pocket costs for tuition, fees, and books, but is limited to a total credit of $2,000. You can use this credit even if you’re not studying as an undergraduate or full-time.
Tax-Saving Measure #2: Donate!
Make Maximum Charitable Contributions
If you itemize your deductions, you can donate personal property to charity. You estimate the amount of the deduction with the property’s “fair market value” as calculated by its “garage-sale” price.
Create a Donor-Advised Fund
You can set aside money and other personal assets in a donor-advised fund. This allows you to deduct your entire contribution in 2022 while still allowing you the flexibility to choose how you want to distribute this property later beyond 2022.
Tax-Saving Measure #3: Open a Retirement Account!
Open a Solo 401(k)
If you are a taxpayer with income from self-employment, you can open a solo 401(k) plan. However, you must open your solo 401(k) by December 31, 2022. The good news is that you have until April 18, 2023, to contribute to your plan. This will allow you to still take a tax deduction for this specific amount on your 2022 tax return.
As a taxpayer with self-employment or freelance income, you can make contributions to the plan in your capacity as an employer and as an employee. As an owner, you can contribute both elective deferrals up to 100% of your earned income up to the annual contribution limit, which is $22,500 in 2023 and $20,500 in 2022. If you are a taxpayer 50 or older, you can contribute $30,000 in 2023 and $27,000 in 2022.
Additionally, you can make nonelective contributions up to 25% of compensation as defined by the plan. Alternatively, if you are self-employed, you make a special computation to calculate the most elective deferrals and nonelective contributions that are available to you. Total contributions to a solo 401(k) are limited to no more than $66,000 for 2023 and $61,000 for 2022.
Open a SEP
You can also open a Simplified Employee Pension (SEP) account. A SEP is less expensive to open and operate than a 401(k) and conventional retirement plans. A SEP allows you to contribute up to 25 percent of your self-employment income. A SEP is a good plan if your cash flow is inconsistent or problematic.
Tax-Saving Measure #4: Open a Health-Savings Account!
Open an HSA
If eligible, you can open a Health Savings Account (HSA) with a qualified HSA trustee to pay for qualified medical expenses. Any distributions from an HSA used to pay for qualified medical expenses are not subject to taxation.
An HSA is a tax-exempt trust or custodial account. You can make contributions to an HSA on behalf of yourself or any other eligible person, including an employer or a family member. These contributions, other than employer contributions, are deductible on the eligible individual’s return even if the individual uses the standard deduction. You can exclude contributions by your employer to your HSA from your gross income.
If you had high-deductible health coverage for yourself only, you can contribute up to $3,650 for 2022. If you have high-deductible coverage for your family, you can contribute up to $7,300 in 2022. If you’re 55 or older, federal tax law allows you to contribute an additional $1,000 to your HSA.
Other related programs include:
- Medical Savings Accounts (Archer MSAs and Medicare Advantage MSAs).
- Health Flexible Spending Arrangements (FSAs).
- Health Reimbursement Arrangements (HRAs).
Tax-Saving Measure #5: Talk to a Qualified Tax Professional!
If you live or work in New York or the Tri-State area and have any questions about any tax-related issue, call 212-490-0704 today for a FREE consultation. You can also learn more online here – THE TAX EXPERTS. We can help you maximize your tax savings for 2022, as well as help you plan ahead to save on your 2023 tax bill!
