5 Tax Savings Tips Every Individual Can Implement Before Year-End 2022
Following are 5 tax savings tips that you can implement regardless of whether you own a business or not. If you would like to learn more about tax savings tips applicable to you as a business owner, check out this article.
1. Traditional and Roth IRA
- An IRA is an account set up with a financial institution that allows an individual to save for retirement, with tax-free growth or on a tax-deferred basis.
- With a traditional IRA, you get a tax deduction when you contribute to the account and will pay taxes when you withdraw the money. Most people find themselves in a lower tax bracket once they retire. Therefore, the funds will be taxed at a lower rate when withdrawn.
- In a Roth IRA, you don't get the deduction when you contribute, but the money grows tax-free. The income from the growth is not taxable.
- For 2022 The IRA contribution limit is $6,000; for 2023, the limit has been increased to $6,500.
- Learn more about IRAs and pensions in general here.
- A HSA is a tax-advantaged savings account created for people who get their insurance coverage through high-deductible health plans. It allows you to contribute pre-tax money to pay for qualified medical expenses. However, unlike a flexible spending account (FSA), it is not a 'use it or lose it' account. Funds can roll over from year to year.
- HSA contribution limits for 2022 are as follows: $3,650 for single filers and $7,300 for MFJ.
- Learn more about the specifics of setting up a HSA account here.
- The dependent care credit maximum amount you could claim for 2022 for multiple children is $6,000. To qualify, you and your spouse must have earned income.
- Unfortunately, the expanded Child Dependent Care Credit of 2021 of up to $16,000 will not be available for 2022.
4. Bunching itemized deductions in one year that would otherwise be spread over multiple years.
- As a result of the increase in the standard deduction, $25,900 for Married Filing Joint 2022, some taxpayers are no longer getting a benefit for itemizing their deductions. However, before you just take the standard deduction, it may be worth your time to do a little math to see if bunching itemized deductions - basically itemizing every other year - could save you money over the long term.
- Here’s how bunching itemized tax deductions work: You bunch as many tax-deductible expenses as possible into a single tax year. In the year you have bunched your itemized deductions, you itemize on your taxes. The following year, you take the standard deduction. Moving forward, you then alternate the years you itemize. Examples of the most common deductions that qualify are property taxes, health expenses, and charitable contributions using a donor-advised fund (item 5 below).
- The law now allows taxpayers to apply up to 60% of their AGI for calendar-year 2022 qualified contributions. There are multiple options for you to designate money for charity before year-end without fully relinquishing control of where the charity will be distributed to.
- Here is a quick summary.
Donor-Advised Funds- DAF
A donor-advised fund is beneficial when you want to donate a lump sum to charity but are not sure yet where to distribute it. You can distribute it at any time you want, there is no minimum, and the account doesn't close after a designated amount of time. A DAF is subject to the 60% limit of your adjusted gross income in 2022.
CL(A)T and CR(U)T - A Charitable Lead Annuity Trust and a CRUT - Charitable Remainder Annuity Trust is a trust in which you make a one-time contribution such as property, stocks, and cash. With a CLAT, a percentage of the initial donation is donated every year over the course of 20 years. Once the 20 years are over the remaining assets go to the beneficiary. A CRUT is a Remainder Trust, which means it does not have to give charity every year. Once the CRUT closes, it has to give the full or remaining amount from the initial contribution to charity.
↔️ Related; Do you know that you can avoid capital gains when donating stocks to charity? Learn more here.
Disclaimer: This article was written in an oversimplified manner designed to help you as an individual. You should discuss this with a tax professional prior to implementing these steps.