No one wants to think about income taxes at this time of year, but those who plan thoroughly will reap the rewards in April. Take these steps now, and you’ll have an easier time (and hopefully owe less to the IRS) next spring.
Check your paycheck withholding. Ideally, this step should be performed earlier in the year, but late is better than never. If you owed a surprising amount to the IRS earlier this year, that could be a sign that your employer is not withholding enough taxes from your paychecks.
Max out your retirement plan contributions. You can make contributions to a qualified retirement plan on a pre-tax basis, meaning you don’t owe income taxes on the money that you contribute to the account. This strategy effectively lowers your overall taxable income. For 2022, you can contribute up to $20,500, plus an additional $6,500 if you’re age 50 or older.
Prepay deductible expenses. If you’re worried about an unusually large tax debt in the spring, prepaying some deductible expenses now can help you reduce it. Pay your mortgage interest, property taxes, medical bills, college tuition, or any other deductible expenses before the end of the year, rather than waiting until January.
Offset capital gains taxes. If you expect to owe capital gains taxes on an asset you sold during the year, you can potentially offset that debt by selling an under-performing asset and claiming the loss. But you must perform these maneuvers before January 1.
Make charitable contributions by December 31. You can deduct up to 60 percent of your adjusted gross income (AGI) by making cash donations to charity, or up to 30 percent of AGI with non-cash donations, but these donations must be made by the end of the year. If you can’t decide on a charity now, contribute to a donor-advised fund. You can still claim the deduction but can disburse the money to chosen charities later.
Remember that we’re here to help guide your financial and tax-related decisions. Give us a call before attempting any complicated tax maneuvers, and we can help you identify the best options for your situation.