We’ve almost made it to the end of another year. Pretty soon, it’ll be tax season. And, while you might not want to worry about taxes before you have to, now is the perfect time to position yourself to pay a little less to the government. Here are several end-of-the-year tax deductions to focus on now.
Download the 2022 Tax Planning Checklist to mark off the items you’ve completed and those of which you can still take advantage.
Donating to Charity
Are you trying to bring down your taxable income? If yes, consider donating to charity. It’s possible to receive a tax deduction for your generosity. You will need a receipt in order to take the deduction, so don’t forget to ask for one. You can also deduct mileage (at $0.14 per mile) if you drive your car on behalf of a charity. In order to take the charitable contribution deduction, you need to itemize your deductions using Schedule A.
Sell Losing Investments
If you are rebalancing your portfolio, or if you want to unload some fundamentally-unsound losers, you can sell at a loss. Capital gains and losses are reported on Schedule D. If you are offsetting your income with leftover losses, you should report the loss on Line 13 of your Form 1040.
Max Out Retirement Account Contributions
If you contribute to a non-Roth qualified retirement account, you can enjoy a tax deduction based on the amount you set aside for your future. Both an IRA and a Solo 401(k) allow you to make contributions for this year up until Tax Day of next year, so keep that in mind as you prepare your taxes. You might be able to squeeze in one more contribution if it makes sense for you, tax-wise.
Boost HSA Contributions
Do you have a high deductible health care plan? If so, you might be eligible for a Health Savings Account, or HSA. You will receive a tax deduction for your contributions. Plus, the money grows tax-free as long as you use your withdrawals for qualified health care expenses. There are different limits for individuals and families, but there are no income limits associated with the tax-deductibility of your HSA contributions.
In order to claim employee-related or job-hunting expenses as a deduction, they need to equal 2% or more of your Adjusted Gross Income. These can include home office expenses (if you telecommute), unreimbursed employee expenses, licensing fees for your job, a passport for a business trip, and a slew of other things. If you want to reach that 2% threshold and are already close, you could make a few extra purchases this year. You could:
- Remodel your home office (assuming it’s used regularly and exclusively for work),
- Prepay work-related continuing education course or malpractice insurance for next year, and
- Buy new tools or pay union dues.
There are probably a few extra purchases you could make in order to bump up your expenses for this year.
In order to claim a deduction for medical and dental expenses, they must exceed 7.5% of your AGI. If you have planned procedures for next year, it may be worth the tax benefits to prepay for them now, rather than wait until next year. For example, you could pay for your kid’s braces upfront, if you have the cash on hand, even if they won’t get them until after the new year. Do you get regular chiropractic adjustments, acupuncture, or physical therapy? See about paying for the next six or 12 months’ worth of visits now. Order contact lenses in bulk, buy the kids new glasses, sneak in those annual exams, or prepay for the LASIK you want to get in the spring.
You could prepay for spring or summer college tuition expenses, in order to take advantage of the Lifetime Learning Credit or American Opportunity Credit. Both of these combined can snag you a whopping $4,500 in credits for this tax year. Even if you don’t qualify for the credits, you might still qualify for a deduction based on the education expenses you pay. If you have student loans, consider making extra payments, which could result in a tax break for the interest you pay.
Adjust Your Withholding
Do you think you’ll owe money on Tax Day? Do you have a side hustle, earn dividends, or have other business income, you might owe more than you’ve paid so far? If that’s the case, you might want to contact your employer and adjust your withholding for the final weeks of the year. If you’ve paid less than 90% of your required taxes during the year, you’ll end up with a penalty.
Avoid Losing Your FSA Money
If you have an FSA, or Flexible Spending Account, you are probably aware that they need to be used, or you’ll lose those funds. Depending on your employer, you may be able to carry over up to $500 to the next year or even have a grace period of up to three months to use those funds in the next year. Do what you can to use that money before you lose it.
If you want to chat about tax deductions before year end, give me a call. Let’s talk through it together.