For the most part, you can’t do anything about 2022’s tax liability but you don't need to wait until the end of the year to look for ways to minimize your 2023 tax liability. Tax planning should take place throughout the year to have you prepared well ahead of tax season. Here are six ways to minimize your tax liability that you can implement any time before the end of this year:
1. Update your payroll deductions - double check that you are claiming the correct deductions and taking advantage of pre-tax benefits that can help lower your taxable income, such as:
Flexible spending accounts (FSAs)- a health savings account (HSA), healthcare insurance, a flexible spending account (FSA), commuter benefits, and childcare expenses. You have until 4/15/2023 to contribute to your health savings account (HSA) to count towards your 2022 income tax return.
2. Maximize pre-tax retirement savings contributions - In 2023, you can contribute $22,500 to your employer's retirement savings plan. If you are aged 50 or older, you can contribute an additional $7,500 to help lower your taxable income.
Other Tax-liability Reduction Strategies
Whether you're an individual or a married couple, you can lower your taxable income while doing good for others by donating to an IRS-qualified charity. To take advantage of charitable tax deductions this year, you must make your donation before December 31st. Here are some common charitable donation strategies to consider:
3. Qualified Charitable Distributions (QCDs) - If you're age 72 or older, you can use a QCD to donate to an IRS-qualified charity of your choice directly from your IRA. The gift won't qualify for a charitable deduction but will allow you to deduct the amount transferred to the charity from your taxable income. A QCD may be helpful if you won't reach a level of itemized deductions to exceed the standard deduction amount on your taxes.
The maximum amount you may donate is $100,000 per year. If you’re married and your spouse also has an IRA, you can donate $100,000 individually, but keep in mind that each spouse must donate the same amount.
4. Donor-Advised Funds (DAFs) - DAFs enable you to donate assets to a charitable investment account and receive an immediate tax deduction. DAF contributions can be timed to coincide with high-income years to provide a larger tax deduction. DAFs grow tax-free, and you can choose which charities to distribute the gift to each year.
5. Non-Cash Charitable Contributions - You can use appreciated stock or assets you’ve held for more than a year as a non-cash charitable contribution by giving them to a charity. A non-cash charitable contribution will help save on capital gains taxes. Make sure you secure a tax deduction to prove the donation when filing your taxes. If you use this strategy, consult your financial and tax professionals to help ensure this executes properly per IRS requirements.
6. Bunch Your Donations - Bunching or concentrating your donations in one year instead of several years can help you make the most out of potential tax deductions. This strategy helps if your total itemized deductions fall below the standard deduction for a single year. By making charitable contributions for several years at one time, the total of your itemized deductions can exceed the standard deduction and offer tax benefits for one year.
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.
This information is not intended to be a substitute for specific individualized tax advice. We suggest that you discuss your specific tax issues with a qualified tax advisor.
All information is believed to be from reliable sources; however LPL Financial makes no representation as to its completeness or accuracy.
This article was prepared by Fresh Finance.
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