Be Ready for Tax Season: Tips for a Stress-Free Filing Experience
Don't wait until tax season to get your financial records in order. Start now and take advantage of opportunities to legally reduce your tax bill. Proper preparation will help you save on your taxes and make the most of tax season.
Get Ahead of the Game: 7 Ways to Optimize Your Tax Return
Investing in an Individual Retirement Account (IRA) can provide tax benefits in addition to helping you save for retirement.
The maximum tax-deductible contribution to an IRA for 2022 is $6,000, or $7,000 if you are age 50 or older. Employees may also contribute up to $20,500 to a 401(k) plan in 2022, with a maximum contribution of $27,000 for those age 50 or older.
You can open an IRA account at any time and still deduct contributions made until the tax filing deadline, but making contributions before the end of the year allows for earlier tax-deferred growth.
Please note that the ability to make tax-deductible contributions to an IRA may phase out as income increases.
To potentially receive a tax credit, consider making qualified energy-saving home improvements by the end of the year. These improvements must meet federal energy-efficiency standards and may be eligible for a credit of up to 30% of the costs in 2022 through 2032. The credit then decreases to 26% in 2033 and 22% in 2034 before expiring.
Review investment gains and losses and consider selling investment losers to offset capital gains.
When calculating gains and losses, be sure to include mutual fund distributions, which are typically taxable gains even if the shares are retained.
If you anticipate being in a lower tax bracket in the next year and have the ability to control the timing of some income, you may want to consider deferring taxes by shifting the receipt of that income into the following year.
Options for shifting income could include year-end bonuses, capital gains, and self-employment income. It is important to carefully review your situation as tax rates may be higher in the future.
To potentially take advantage of medical expense deductions, consider bunching elective medical expenses into one year. This may allow you to exceed the threshold for deducting medical expenses, which is currently set at 7.5% of your adjusted gross income. It is important to consult with a tax professional to understand the specific rules and limitations related to medical expense deductions.
When calculating deductible medical expenses, be sure to consider the following items:
Elective dental work, such as teeth cleanings, fillings, and crowns
Eyeglasses and contact lenses
Insurance premiums that you personally pay for, including health, long-term care, and disability insurance
Weight-loss and stop-smoking programs that are prescribed by a doctor for a specific medical condition
Over-the-counter medical supplies, such as hearing aid batteries and first aid kits
Donating to charitable organizations can also provide tax benefits. Charitable contributions may be deductible if made to qualified organizations, such as 501(c)(3) charities. It is important to keep records of your charitable donations, including receipts or other documentation, in order to claim a deduction on your tax return.
Year-end charitable donations can be made in the form of cash or appreciated securities, such as stocks. Donating appreciated securities allows you to claim a deduction for their current fair market value on your tax return.
Cash gifts to charity can be made by writing a check or charging the donation to a credit card in December. The donation can then be claimed as a deduction on the current year's tax return once the credit card bill is paid in the following year. It is important to obtain a letter of acknowledgment from the charity that includes the following:
Date of the gift
The amount
Tangible benefits received in exchange for the donation, such as a thank you gift.
This documentation will be necessary to claim the charitable deduction on your tax return.
Donations of used vehicles may be eligible for a tax deduction based on the fair market value of the vehicle if the charity intends to use it in their tax-exempt work. If the charity sells the donated vehicle, the deduction is limited to the actual proceeds of the sale
To fund college expenses for a child or grandchild, consider contributing to a 529 college savings plan. This can offer state income tax benefits and allow for tax-free withdrawals to pay for future college costs.
Direct payments made to an educational or medical institution for the benefit of a child or grandchild may also be exempt from gift tax limitations. This can be an effective way to cover education and healthcare expenses while minimizing the impact on your tax situation.
