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Eight Things to Do Now to Cash In at Tax Time

Updated for Tax Year 2022 • December 1, 2022 09:21 AM


OVERVIEW

Now is a good time to review your financial situation and do a rough estimate of your income tax bill for the year. This will give you an incentive to consider these short and long-term strategies to minimize your tax bill. Take these steps before year-end to reduce your taxes on your tax return.


For information on the third coronavirus relief package, please visit our “American Rescue Plan: What Does it Mean for You and a Third Stimulus Check” blog post.


 

1. Contribute to an IRA

Asian woman using a tablet

Socking money away in an IRA doesn’t just help you at retirement—it can also reduce your tax bill today. The maximum tax-deductible contribution to an Individual Retirement Account (IRA) for 2022 is $6,000, $7,000 if you are age 50 or older. (The maximum employee contribution to a 401(k) plan in 2022 is $20,500, $27,000 if you are age 50 or over).

You can open an IRA account at any time and still deduct contributions made until the filing deadline, but making them before year-end starts the clock on tax-deferred growth sooner. The ability to make a tax deductible contribution to an IRA phase out as your income increases.

2. Make your house energy-efficient

Solar panel installation

If you make qualified energy-saving home improvements by the end of the year, you can claim a tax credit of up to 30% of the costs in 2022 through 2032. After that, the credit steps down to 26% in 2033 and then to 22% in 2034 after which it expires. The improvements must meet federal energy-efficiency standards in order to qualify for the credit. For more information, go to www.EnergyStar.gov.

3. Review investment gains and losses

Stack of money

Consider selling investment losers to offset capital gains. When calculating your gains and losses, be sure to include mutual fund distributions; typically they are taxable gains even when you hold onto the shares.

You may want to sell appreciated securities before year-end (or donate them to charity; see #7 below). If you have excess losses, they may be carried forward into future tax years, and used to offset other income at a rate of no more than $3,000 each year.

4. Shift income from one year to the next

Agenda notebook with calendar

If you expect to be in a lower tax bracket next year, and have control over the timing of some income, consider deferring taxes by shifting receipt of the income into the following year.

Possibilities include year-end bonuses, capital gains and self-employment income. Review your situation carefully because your tax rates could be higher in the next year.

5. Bunch elective medical expenses into one year

Doctor and patient looking at x-ray

Because uninsured medical expenses are deductible on federal tax returns only to the extent that they exceed 7.5% of your adjusted gross income (AGI), you stand a better chance of having enough to deduct if you group those expenses into a single year.

In adding up your expenses, consider

  • elective dental work,
  • eyeglasses and contact lenses,
  • insurance premiums that you personally pay for,
  • health and long-term-care insurance,
  • weight-loss and stop-smoking programs, and
  • over-the-counter medical supplies such as hearing aid batteries.

6. Make charitable contributions

Vintage car in front of Route 66 sign

You can make year-end gifts to charity with cash or with appreciated securities. If you donate appreciated securities (like stocks), you can take a deduction for the current fair market value.

If you decide to make gifts in cash, you can simply write a check. Or you can put the amount on a credit card in December, pay the bill when it arrives the following year and deduct the donation in current year. Either way, you must have a letter of acknowledgment from the charity, showing:

  • the date of the gift,
  • the amount, and
  • whether you received any tangible benefit in exchange, such as a thank you gift.

Donations of used cars may be deducted at fair market value only if the charity uses the vehicle in its tax-exempt work. If the charity sells it, your contribution is limited to the actual proceeds of the sale by the charity.

7. Fund college expenses for your child or grandchild

Grandfather and grandson sitting in front of window

Contribute to a 529 college savings plan for your child or grandchild and you may reap some state income tax benefits. You’ll also have tax-free withdrawals from the plan to pay for future college costs. In addition, direct payments to an institution for educational or medical purposes are not subject to gift tax limitations.

8. Establish a health savings account

Family surgeon in operating room

Taxpayers with high-deductible health plans who are not covered by any other health insurance or enrolled in Medicare may deduct contributions to a health savings account (HSA).

HSA distributions are not taxable if you use them to pay for qualified medical expenses including

An HSA provides triple tax savings:

  1. Contributions are tax-deductible,
  2. earnings on the account are tax-free, and
  3. withdrawals for qualified medical expenses are also tax-free.

The account goes with you if you change jobs or move, and unused money in the account may be used in future years.

Following these suggestions can reduce your tax bill for the current year and into the future. But keep in mind that if you are subject to the alternative minimum tax (AMT) you may lose some deductions, so you’ll need to follow very different strategies.

And don’t forget state income taxes in your planning; the rules there may differ from federal tax rules.

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