If you’re like most people, you probably loathe tax seasons (unless you’re expecting a refund). We recognize that the IRS Tax Code is complex, but that doesn’t mean you can’t significantly lower your tax liability. We’re proud to offer robust tools, such as a money organizer and transaction tracker that can help streamline the tax preparation process. While you can’t file your taxes through Chunk, you can certainly use our platform to keep a close eye on your finance before tax time!
Are you tired of a hefty bill come tax season? Here are eight of the best ways to save money on your taxes:
1. Contribute More to Your 401(K)
You fund your 401(k) with pre-tax dollars; thus, the more you contribute to your 401(k), the less you pay in federal and state income taxes. However, you can’t get carried away and contribute 90 percent of your salary. The IRS limits how much individuals can contribute to their 401(k) plans. For the tax year 2022, employees can contribute a maximum of $20,500 per year. Individuals over 50 can also contribute a catch-up amount that the IRS caps at $6,500. These limits include your contributions, not the portion that your employer matches. The maximum you can fund your 401(k) (including your employer’s match) is $61,000 or $67,500 if you are over 50. It’s an excellent idea to always stay up-to-date with the most recent 401(k) contribution limits for the applicable tax year.
2. Fund an IRA
Individual Retirement Accounts (IRAs) are similar to 401(k) plans, but there are a few crucial differences. To preface, there are two IRAs: a traditional IRA and a Roth IRA. You can deduct your traditional IRA contributions, but you must pay taxes when you withdraw the funds. On the other hand, Roth IRAs don’t provide an immediate tax benefit. You fund a Roth IRA using post-tax dollars. However, you don’t have to pay taxes when you make qualified withdrawals from a Roth IRA. Like a 401(k) plan, the IRS sets an annual contribution limit for IRAs. The current contribution is $6,000 and $7,000 if you’re over 50.
3. Start a Flexible Spending Account (FSA)
Most employers give employees the option of opening a flexible spending account (FSA). The significant advantage of FSAs is that you don’t have to pay federal or state income tax on your contributions. However, like IRAs, the IRS sets a maximum contribution for FSAs which currently sits at $2,850. Moreover, companies can contribute $500 to their employees’ FSAs, regardless of whether the employees contributed. After funding the account $500, organizations can not make additional contributions unless the employee funds their FSA. You can use the funds in your FSA to pay for various medical expenses and over-the-counter medications. It’s essential to note that you cannot use funds in an FSA to pay for health insurance premiums.
4. Aim for Long-Term Capital Gains
If you trade financial instruments, such as stocks and bonds, you should try to hold them for more than a year. Now, if you’re a day trader, this strategy doesn’t apply to you. Nevertheless, having financial instruments for more than a year before selling them gives you a massive tax advantage. The IRS taxes short-term capital gains the same as ordinary income (which can reach 37 percent). On the other hand, long-term capital gains are subject to a tax rate ranging from zero to 20 percent. Now, you might be wondering, “why does the IRS charge less tax on long-term capital gains?” The answer is relatively straightforward: the IRS charges less tax to encourage long-term investment.
5. Defer Bonuses
Receiving a bonus at work is excellent, but that smile can turn into a frown if the bonus bumps you into the next tax bracket. However, there are various rules when it comes to deferring a bonus. First, you can only defer the additional income if you actually received it. That is, you can’t delay a bonus if you haven’t hit your targets or merely received a promise from your company. Additionally, you must have received the bonus within 2 ½ months before the end of the year. Many companies refer to this deferral option as a “deferred compensation plan,” and it doesn’t just include bonuses. Nevertheless, deferred compensation is a complex subject, so it’s an excellent idea to consult a Certified Public Accountant or compensation professional at your company before picking the right strategy.
6. Donate
Donating is perhaps one of the most popular ways to save money on taxes and give back to organizations that you value. If you wish to deduct the donation from your salary, you must donate to a 501(c)(3) public charity. Public charities typically include schools, medical research organizations, churches, and hospitals. Generally, you can’t donate more than 60 percent of your adjusted gross income (AGI). You can also donate everyday household items, such as furniture and appliances. However, these items only qualify if they’re in at least “good” condition. The IRS certainly doesn’t want you claiming deductions for offloading your junk!
7. Consider Commonly Missed Deductions
There are tons of commonly missed deductions the average taxpayer overlooks. You can catch these missed deductions in one of two ways. First, you can use an online tax filing website like TurboTax and H&R Block. These tax filing services walk you through the most common deductions, ensuring that you don’t forget anything. Another option is to meet with a Certified Public Accountant, especially if you have more sophisticated finances. CPAs generally charge anywhere from $200 – $400, so they’re definitely worth the money if you’re able to decrease your tax liability.
8. Give Yourself Ample Time
Lastly, don’t scramble to get your taxes done at the last second. You may forget critical deductions or misstate your adjusted gross income when you’re in a rush. Not only that, but the IRS could charge you a fee if you miss the deadline.
Can You Use Chunk Finance to File Your Taxes?
Chunk isn’t a tax preparation software, but our platform features various valuable tools, such as a transaction tacker and money organizer. If you’re expecting a large tax bill, you can use our expense management tools to cut your costs and prepare for tax time. Sign up for free today!