6 things to check off your tax to-do list before 2022 ends
Many people avoid thinking about taxes until the April deadline rolls around each year. But by then it may be too late to take advantage of the top strategies to cut down your tax bill—or get a bigger refund.
Take some time before January 1 to check off these tasks while they still count.
6 tax to-dos before 2022 ends
Federal tax returns and payments are due on Apr. 18, 2023 (state deadlines vary, but many match the federal deadline). While W-2 income statements won’t be sent out until late January, you can use an online calculator now to estimate what you might owe. All you need are your pay stubs for the year, showing how much you earned and how much you paid in income taxes.
If you’re hoping to shrink your tax bill, or possibly boost your refund, here are some strategies to try—plus one time-saving tool that’ll make preparing your return easier.
1. Create an online IRS account
Tax season tends to go more smoothly when you’re organized. Take 15 minutes to set up an online account on the IRS website so you don’t have to go digging through desk drawers or calling your former employer for a replacement copy of your W-2 at the last minute.
While you can’t actually file taxes from your account, you can access digital transcripts of your past four years of tax returns and income documents, pay a balance, make an estimated quarterly payment, set up a payment plan, and get a deadline extension.
To make an account, you need to have a passport, driver’s license, or state ID on hand. The IRS uses the ID.me platform for identity verification, so the process will also require either taking a selfie with facial recognition software or recording a short video chat with an agent.
2. Contribute to employer-sponsored retirement accounts
If you have access to a 401(k), 457, or 403(b) retirement plan through your employer, your contributions are sliced off the top of your paycheck, before income taxes are taken out (you pay taxes later on your withdrawals).
For example, say your gross annual salary is $90,000 and you contribute 10% of your pay, or $9,000, to your 401(k) through paycheck deferrals throughout the year—that brings your taxable income to $81,000. Thanks to pre-tax retirement contributions, your top tax rate is 22% instead of 24%.
Every retirement plan has an annual contribution limit. If you haven’t hit the limit yet and can afford to put more of your final paycheck this year into the plan, it’s a good option, says Marla Chambers, an accountant and senior financial planner at Buckingham Advisors.
Most employers allow you to adjust your deferral amount “in short order” if you reach out directly to HR, Chambers adds.
If you can’t swing it by December 31, consider contributing to a traditional IRA. Deposits can count toward 2022 all the way up to the tax deadline in April, and can be claimed as a tax deduction (they’re effectively the same as a pre-tax salary deferral) if you meet the requirements for income and filing status.
3. Evaluate the standard deduction vs. itemized deductions
The vast majority of taxpayers claim the standard deduction to reduce their income by a preset amount: $12,950 for single filers and $25,900 for married, joint filers in 2022.
Some taxpayers, however, may be able to unlock an even bigger deduction by adding up certain allowable expenses, called itemized deductions. These include state and local taxes, property taxes, mortgage interest, out-of-pocket medical expenses, losses related to theft or federally declared disasters, and donations to tax-exempt charities.
If you paid any of those expenses during the year and think the total may add up to more than the standard deduction for your filing status, it’s time to do the math to determine whether the switch is worth it. If you come close to eclipsing the standard deduction, consider “bunching” future expenses into this year, Chambers says.
For example, if your mortgage payment is due on January 5, pay it in December instead so you can count the interest portion as a 2022 expense. Similarly, if you like to give money to your favorite charitable cause regularly, consider moving a few of next year’s planned donations to this year. “It's a great planning tool and it's pretty easy to do,” Chambers says.
4. Sell losing investments to offset gains
The IRS taxes capital gains, which are profits you earn when you sell a stock, an exchange-traded fund (ETF), or a mutual fund.
But not all investments increase in value—and you can use that to your advantage. If you have an investment that’s lost value since you purchased it, you can sell it by December 30, the last trading day of the year, and claim a loss. That loss will be applied to your capital gain for the year, effectively reducing the amount that’s subject to taxes.
For example, if you made a $6,000 profit from selling Stock A this year, but realized a $4,000 loss from selling Stock B, then your total taxable gain will be $2,000.
If your total capital gain drops to zero and you still have losses left over, you can offset your income for the year by up to $3,000. “This year particularly has been a good year to look at stocks that are at a low” and take a loss, Chambers says.
This strategy, called tax-loss harvesting, is a popular and effective tax-saving tool for investors who use brokerage accounts (it doesn’t work with retirement accounts, due to the tax-deferral features). Some robo-advisors even do it automatically. But in order to maintain a balanced portfolio, experts recommend repurchasing similar investments after you sell.
“Now, the IRS does have a little caveat to this rule that you cannot buy that same security within 30 days of selling it because it would violate what's called a wash sale,” says Jonathan Johnson, an accountant and senior financial adviser at Blue Chip Partners.
For example, you can’t sell your shares in Coke to claim a loss and then repurchase them immediately, he explains. But you could buy shares in Pepsi, since it’s a different company (or just wait 30 days), and maintain your exposure to that sector, Johnson says.
5. Contribute to a 529 education savings plan
College is getting pricier by the year, and more and more families are looking for effective ways to shore up funds to cover tuition and other school-related expenses.
One option is the 529 savings plan, which lets people invest money in stock and bond mutual funds but avoid paying any federal capital gains taxes on the growth when they use the money for qualified education expenses. It also offers more immediate, and often generous, tax breaks at the state level.
According to a report by BlackRock, which manages a 529 plan in Ohio, three dozen states offer income tax credits or deductions to anyone who contributes money to a 529 account, including parents, grandparents, and other relatives (in a handful of states, only the account owner qualifies for the tax benefits).
What’s more, adds Chambers, “if a state allows for a $5,000 deduction but you give $10,000, most states will allow you to carry over [the difference] to the following years until you use it up.” Check your state’s plan options—some even allow tax breaks for people who save in another state’s plan.
6. Check your tax withholding for next year
In preparation for the new year, make time to review and update Form W-4 if you’re a salaried or hourly employee. This document tells your employer how much to take from your paycheck to cover taxes.
Any time your personal or financial situation changes (i.e., you get married, have a baby, or take on a second job or gig work), it’s a good time to review your withholding.
If you end up owing money to Uncle Sam in April, you didn’t withhold enough. If you end up with a refund, you’ve withheld too much. If you haven’t updated your W-4 in 2022, look back at your 2021 tax return to see how much was withheld and what your tax bill or refund looked like to make adjustments for the upcoming calendar year, Johnson says.
Submit a new W-4 as soon as possible to have the right amount withheld from your paychecks in 2023—employers may take up to 30 days to update payroll deductions.
The clock is running out to make some major tax moves for 2022. If you want to reduce your taxable income, strategies include bumping up your 401(k) contributions and weighing the possibility of itemizing your deductions. If you’re an investor, think about cutting your losses on devalued investments using tax-loss harvesting.
This story was originally featured on Fortune.com
More from Fortune:
People who skipped their COVID vaccine are at higher risk of traffic incidents
Elon Musk says getting booed by Dave Chapelle fans 'was a first for me in real life' suggesting he's aware of building backlash
Gen Z and young millennials have found a new way to afford luxury handbags and watches—living with mom and dad
Meghan Markle’s real sin that the British public can’t forgive–and Americans can’t understand