You can take action to help lower your 2022 tax bill later. It would help if you made contributions, or distributions, so you don’t miss out on these tax-saving strategies. Here are five tax-saving moves to make now to help lower your taxable income:
1. Max out your tax-deferred retirement savings contributions
Tax-deferred retirement accounts like 401(K)s, 403(b)s, 457 plans, and IRAs fund with pre-tax dollars. Any contributions made before the end of the year will help lower your taxable income.
For the 2022 tax year, you can contribute up to $20,500 to your tax-deferred retirement savings account or $27,000 if you’re 50 and older. The maximum IRA contribution is $6,000; if you’re 50 and older, you can contribute $7,000 before December 31, 2022.
2. Take your required minimum distributions (rMDs)
If you’re over age 72, you must take RMDs from your tax-deferred retirement accounts by the end of the year. If you forget, you may be subject to a 50% penalty on the portion of your RMD you failed to withdraw. If you turn 72 in 2022, you have until April 1, 2023, to take your first RMD.
3. Contribute to a Roth 401(k)
If your employer offers a Roth 401(k) and you haven’t maxed out your traditional 401(k), you can make after-tax contributions to a Roth 401(k) up to the $20,500 limit and up to $27,000 if you’re age 50 and older. To maximize your Roth 401(k) contribution, you must subtract the amount you contributed to your traditional 401(k), then donate it to your Roth 401(k) before December 31, 2022. Maximizing your Roth 401(k) can help lower your taxable income and save you at tax time too!
At age 72, Roth 401(k)s are subject to RMDs, but all contributions and earnings can be withdrawn tax-free.
4. Contribute to a 529 College Savings Plan
You may deduct state taxes for contributions you make to a state-sponsored plan. Even though there is no federal tax deduction for 529s, the money in these accounts grows tax-free and can be withdrawn to use toward qualified education expenses like tuition, room and board, and books. Many states offer a state income tax credit or deduction up to a certain amount for parents or grandparents that contribute.
5. Maximize your Flexible Savings Account (FSA) contributions
Think of FSAs as employer-sponsored bank accounts to cover your out-of-pocket healthcare costs. If you still need to max your FSA contributions this year, you still have time to contribute. Employee contribution amounts are limited to $3,050 per year per employer. If you’re married, your spouse can put up to $3,050 in an FSA with their employer.
Any funds that remain in your account on December 31, 2022, will roll over—but only if your employer has opted-in for 2022 by amending their benefits plan with their plan administrator.
Talk to us today
To better understand if you are making the right moves for all of your end-of-year financial planning, visit with your financial professional. Contact us today!