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How to lower your tax bill – Forbes Advisor

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It’s never too early to start thinking about tax season, however distant it may be. Tax time will be back before you know it, and by then it’ll be too late for many of the maneuvers that can lower your tax bill and keep more of your money in your pocket.

So don’t spend the tax off-season dithering, take action. Now is a great time to consider these eight steps that can make things less painful the next time you file your taxes.

1. Adjust your restraint

Your first step should be to make sure enough money is withheld from your paychecks to avoid a huge tax bill — and penalties for underpayment — in the next tax season.

If you owed a lot of money on your last tax return, complete a new Form W-4, “Employee Tax Withholding Certificate”. Use the IRS withholding tax estimator to complete the form, then submit it to the payroll department where you work. Your employer will use the new W-4 to adjust the amount of taxes withheld from your paycheck for the remainder of that calendar year.

If you are self-employed, you must make your own estimated tax payments throughout the year. Get help from a tax advisor or use the worksheets included with the IRS Form 1040-ES“Estimated tax for individuals”, to calculate the estimated amount of your quarterly payment.

2. Contribute to a retirement account

Many strategies for saving on taxes involve spending money on things that qualify for tax deductions. Contributing to a tax-deferred retirement account is one of the few ways to lower your tax bill while keeping money in your own pocket, or at least in a retirement account in your name.

For the 2022 tax year, you can contribute up to $20,500 to an employer-sponsored 401(k) plan ($27,000 if you’re 50 or older). Don’t have a 401(k) plan at work? You can contribute up to $6,000 to a traditional IRA ($7,000 if you’re 50 or older).

You can deduct contributions to a 401(k) or traditional IRA on your federal tax return. Plus, the money can grow tax-free until retirement.

3. Contribute to a health savings account

If you have a high-deductible healthcare plan, you can contribute to a health savings account. It’s a tax-advantaged savings account that lets you set aside money to pay for eligible medical expenses.

HSAs offer a triple tax advantage. First, contributions to an HSA reduce your taxable income. Second, you don’t have to pay tax on any investment returns from the account. And third, as long as you use the money in the account to pay eligible medical expenses, withdrawals are tax-free.

For 2022, you can contribute up to $3,650 to an HSA that only covers you, or $7,300 to a family plan.

If you don’t have a high-deductible healthcare plan, find out if your employer offers a flexible spending account. A health care FSA lets you pay for many medical, dental, and vision expenses using pre-tax dollars.

4. Donate to charity

You may be eligible for a tax deduction for your charitable contributions.

As long as you itemize deductions, you can deduct cash and in-kind contributions to charitable organizations. Your deduction is limited to 50% of your adjusted gross income (AGI) — your gross income less some deductions and other adjustments — on your 2022 tax return.

The catch is that you have to itemize in order to deduct charitable contributions, and about 90% of taxpayers claim the standard deduction rather than itemizing, as it provides a greater tax benefit.

One way to overcome this hurdle is to “bundle” your donations into a year. For example, instead of giving $1,000 a year for the next five years to your favorite charity, you could give $5,000 this year.

Group donations, combined with deductions for mortgage interest, state and local taxes, and out-of-pocket medical expenses, could help push your itemized amortizations higher than your standard available deduction.

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5. Take credit for having a child

Raising a child is expensive. Fortunately, two tax credits available to parents of dependent children can help offset some of these costs.

Child tax credit

The Child Tax Credit is worth up to $2,000 per dependent child under age 17 at the end of 2022. This credit is being phased out for high-income taxpayers, based on “modified adjusted gross income (MAGI)”, i.e. the adjusted gross income. with some added tweaks. If you are a single filer with over $200,000 MAGI or a joint filer with over $400,000 MAGI, you cannot claim the credit.

The Child Tax Credit is partially refundable, so if it reduces the amount of tax you owe to zero, you can get back up to $1,400 of the credit.

Credit for child care and dependent care

The Child and Dependent Credit helps pay for the care of a dependent child under age 13 (or a spouse or dependents unable to care for themselves) while you work or looking for work.

The amount of the credit depends on the number of dependents, the amount you paid for care during the year, and your adjusted gross income.

Taxpayers with adjusted gross income over $438,000 cannot claim the credit.

6. Get a credit to pay for your college education

Paying for college for yourself, your spouse or a dependant? If so, the tax code offers two credits to help offset those costs.

US Opportunity Tax Credit

The US Opportunity Tax Credit is worth up to $2,500 per student for the first four years of college. To be eligible, the student must be enrolled at least half-time and pursuing a degree or other degree of study.

The credit is partially refundable, so if it reduces the amount you owe to zero, you can get a refund of up to $1,000.

Lifetime learning credit

The Lifetime Learning Credit is worth up to $2,000 per statement. It is non-refundable, but it can be used for undergraduate, graduate, and professional courses, even if you are not pursuing a degree.

The US Opportunity Tax Credit and the Lifetime Learning Credit for High Income Taxpayers are being phased out. To claim the full credit on your 2022 tax return, your adjusted adjusted gross income must be $80,000 or less ($160,000 or less if you are married and filing jointly).

7. Avoid Capital Gains Tax

You owe capital gains tax when you sell an asset, such as securities or real estate, for more than you paid. For example, if you buy shares for $1,000 and sell them for $2,000, you have to pay tax on $1,000 of capital gains.

The tax rate you will pay on these gains depends on how long you have held the asset and your total taxable income. When you hold an asset for one year or less, it is a short-term capital gain taxed at ordinary tax rates, ranging from 10% to 37%. If you held it for more than a year, it’s a long-term capital gain taxed at more favorable long-term capital gain rates.

Capital gains tax rates for 2022

There are several ways to minimize or even avoid paying capital gains taxes.

  • Preserve your assets for the long term. Holding assets for more than a year before selling allows you to take advantage of lower rates of appreciation.
  • Include reinvested dividends. When you sell a security, be sure to include any reinvested dividends in its cost base, which is the original value for tax purposes. For example, suppose you buy a stock for $1,000, invest $100 in dividends, and then sell it for $2,000. If you include reinvested dividends in your tax base, you pay tax on $900 of capital gains instead of $1,000.
  • Donate appreciated stock. Rather than donating money to your favorite charity, consider donating stocks that have been appreciating for more than a year. When you donate shares, you do not have to pay capital gains. Additionally, you can claim the fair market value of the stock as a charitable donation.

8. Take advantage of state tax breaks

Many states offer their own versions of popular federal tax deductions and credits, as well as state-specific tax breaks. So don’t forget to look for ways to reduce your tax bill there.

For example, in New York Empire State Child Credit is available to taxpayers claiming the federal child tax credit. California has its own credit for child care and dependent care expenses, worth a percentage of the federal appropriation. Arizona provides two separate tax credits for residents who donate to charities.

Tax credits and deductions vary by jurisdiction, so check with your tax advisor, state tax authorities and any local authorities to make sure you don’t miss out on any tax breaks available. to you.

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