December is a time to revel in the rewards of a successful year. January is when you need to pay the price for that. Yes, we’re talking about income and taxes. What looks good on paper at the end of the calendar year loses its luster when that tax bill comes around. In today’s article, we’ll show you some steps you can take to save on taxes and improve your finances.
Before we begin, it’s also a good time of year to set up a debt payoff program. Sit down with a debt paydown calculator with a plan to eliminate your credit card debt. Taxes won’t seem like such a huge burden if you’re not making high-interest credit card payments every month. It could take a while, but every journey begins with a first step.
Tip #1: Increase Your Retirement Contributions
This won’t help you with the next tax bill, but it could cut down what you owe in 2023. If you have a 401(k) plan, you can contribute up to $19,500 per year. If your retirement account is an IRA, that limit is just $6,000. Both are tax deferred, so putting your money into a retirement account now reduces your adjusted gross income. This will lower your taxes.
Tip #2: Change Your W-4 Form
Thinking ahead once again, change the number of dependents on your W4 form to either one or zero. That reduces the amount of money you’ll take home during the year, but it will also lower your tax liability for next year. This might require that you live on a stricter budget. Do the math and make sure you’re not leaving yourself short on essential living expenses.
Tip #3: Open a Health Savings Account (HSA)
Deposits into a health savings account (HSA) are tax deductible and withdrawals are tax-free. The only caveat is that the money needs to be used for medical expenses. That includes copays, office visits, prescriptions, dental, and vision care. These items add up during the course of a year, so using an HSA to pay for them can save you significant money on your taxes.
Tip #4: Make Some Extra Donations in December
Charitable contributions are tax deductible, and you still have time to get a few more in before the current year closes. Think of it as giving your money to those who need it instead of letting the government take it in April. Check your local state tax laws because they may have limits on the amount of charity you can write off. Donations can be cash, clothing, cars, etc.
Tip #5: Tax Loss Harvesting
If you own stocks and some of them have lost money this year, sell them. You can write the losses off, lowering your adjusted gross income. Conversely, you should hold any stocks that are showing big gains. It’s tempting to sell them for extra holiday money, but you’ll need to pay capital gains taxes on the profits if you do. Wait until January if you must sell.
The Bottom Line: Don’t Pay More Taxes than You Should
Many people don’t look for additional tax deductions and paid tax preparers are not licensed financial advisors. They won’t recommend tax savings strategies or give you investment advice. In most cases, they can’t, either due to licensing issues or insufficient knowledge. Take the suggestions we offered here and seek out professional financial advice for more.
Sources:
https://www.nerdwallet.com/article/taxes/tips-save-taxes
https://money.usnews.com/money/blogs/my-money/articles/ways-to-save-money-on-your-taxes-this-year
https://www.nerdwallet.com/blog/health/hsa-qualified-expenses/