Make sure you are prepared for the end-of-the-year taxes with these easy planning tips!
No matter what you want to do, it is good to have a plan before you start doing it. This is especially true when you try to organize something, be it at work, during your day, or even on a trip with your loved ones. It becomes even more important when it comes down to important things such as taxes. While we still have quite some time until April, the way in which you are going to end the year is going to count a lot toward what your tax filing will look like.
The financial decisions at the end of the year count way more towards your taxes than you could imagine, especially if you are trying to save more towards your retirement fund, you are trying to hold investments outside those savings funds, or you are trying to itemize deductions.
In order to make the most of the potential tax cuts and with only a few months left, you should make sure that you devise a plan and start acting accordingly to it already! Here are our recommendations and top ways to reduce your tax bill this tax season!
Let us know if any of our tips have made it into your plan in the comments down below!
#1 Prepay the bills you can, so you can deduct them
Generally speaking, every American knows by now whether or not they will be itemizing or if they will be trying to access the standard deductions with the 2022 tax return, especially if their finances haven’t changed a lot. If you plan to itemize, then the best plan for you would be to start prepaying all the deductible expenses before we all ring the bell on the New Year. This also includes payments like possible mortgage payments and state taxes that are going to be due in January.
Another great item to add to your plan would be to pay your property tax earlier! That way, you could end up deducting up to $10,000 from local and state taxes. The easiest way to do this is to check in with your municipality to see if they allow such a move. Then, if you aren’t maxed out for the year, pay the tax bill for the property tax that is due in January in December, and then you can deduct it from the 2022 taxes.
#2 Two in one: max out your donations and also get to declutter
If you are one of those people who love to itemize, then you should definitely be decluttering before the year ends. Not only will you be able to get rid of the clothes, furniture items, or kitchenware you are no longer using and give them to a better cause, but you will also be able to boost your deductibles with this selfless act.
Your deduction will be based on the price the donated item would have had on its “fair market value,” which means how much it would have sold for if it had ended up in a consignment or thrift store. If you aren’t sure how much they are going to cost together, there are some online tools that can help you if you search for them.
However, if you plan to use this deductible-boosting method, you should be prepared to show that you have actually done it. For contributions over $250, you should have a written acknowledgment of the donation from the place you chose. You should also have an appraisal if you have decided to donate items like art pieces or antiques worth over $5,000.
#3 Convert to a Roth IRA
This is not something that you should have set in stone when it comes to making a tax plan, but you should be keeping it in mind as a possibility. You could convert some of the money from your traditional IRA fund to a Roth IRA this year. The conversion will end up costing you when it comes to taxes, but the money will then end up growing tax-free in the Roth account, and you will also pay less in taxes later.
It is advisable not to convert your whole traditional IRA to a Roth IRA because this can end up bumping you up when it comes to tax brackets. Yet, you can avoid that by spreading the conversions over a few years.
The other thing you should be careful of is not to make too large a conversion if you are close to retiring and you plan to sign up for Medicare; if your adjusted gross income (AGI) together with your tax-exempt interest is higher than the threshold, you will have to pay more for Medicare Part B (which deals with medical coverage).
#4 Plan to open a Donor-Advised Fund
If you open a donor-advised fund, and then you put your money or other assets you may own (like personal property or stocks) into it, you will be able to deduct the entire sum you have contributed to the fund from that year’s tax return. What’s more, you can decide later which charities you want to get grants from your fund. There are specialized firms with which you can open such donor-advised funds, or you can look at community foundations.
This is a great way to plan ahead if you want to be able to itemize and also be able to lift your deductible limit above the standard one, but you should also read more into it and make sure that such a fund is a good move for you. You should also not rush into it because of the appeal of raising deductibles and the possibility of itemizing.
#5 Transfer some of your IRA money to charity
If you are 70 and a half or older, it would be a good plan to consider paying some of your traditional IRA money (up to $100,000) towards a charity of your choice. As long as you make the transfer directly from your IRA account toward the charity account, you will be able to deduct that amount.
If you are 72 and older, this benefit is going to be of interest to you because any contribution of this nature will count towards your required minimum distribution. Any payment that you make from the IRA account counts as a “charitable distribution” and will end up reducing the side of the IRA. It will also reduce other further withdrawals you will be required to make, and your tax bill will also end up being smaller.
What’s more, it will also help keep your income under the Medicare surcharge threshold and help you keep the percentage of your Social Security benefits that are taxable lower too! For this plan to work, you will have to make a charitable donation before the end of this year.
#6 If you have a side business, you can boost your retirement savings
If you’re close to retirement and you also have a freelance job or are even self-employed, you can both boost your retirement savings and manage to get a tax deduction. That is if you are going to open a solo 401(k) plan by December 31st. Don’t worry, you can still contribute to the plan until April 18th, 2023, and those payments still count toward your 2022 tax deduction.
Solo 401(k) plans accept up to $27,000 per year if you are 50 or older (only $20,000 if you are younger), minus any other contributions you may have to another 401(k) plan with your employer if you still work a 9 to 5 job. In addition, you can contribute up to 20% of your net income to this solo plan, but it cannot exceed your self-employed or freelance income for that year.
If you’re a woman, you should definitely check out the unique ways in which Social Security benefits affect only them!
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