How To Save on Taxes After December 31st
Now that the end of year has come and gone, you might be left wondering whether you still have any opportunities to maximize your taxes before filling. The good news is that you can still put in place some measures to reduce your tax bill.
While it is true that many tax saving tactics did have a deadline of December 31st, there are a number of steps you can take to save money and avoid penalties at tax time.
4 Steps To Reduce Your Tax Bill
Now that December 31st has passed, most of the tax-reducing strategies still available to you revolve around retirement contributions, avoiding penalties, and getting as organized as possible for filling.
To help, we’ve pulled together these four, last-minute tips to help you lower your taxes as you prepare your tax return:
1. Contribute (more) to your retirement accounts
2. Make an estimated tax payment to avoid Q4 penalties
3. Organize your records for tax time
4. File on time
We’ll now delve deeper into these areas.
1. Contribute (More) To Your Retirement Accounts
December 31st was the deadline for contributing to a 401(k) or 403(b). However you have until April 18th to contribute to a traditional IRA.
You can contribute up to $6,000 to a traditional IRA and $7,000 if you are over age 50. Making a deductible contribution to a traditional IRA will help you reduce your taxable income.
Another strategy you can take if you have a Keogh or SEP (Simplified Employee Pension plan), is to get a filing extension to October 16, 2023. You can then wait until that date to put 2022 contributions into those accounts.
It’s worth noting that the contribution limit for a SEP is 25% of your compensation or $66,000 for 2022. For a Keogh plan you can contribute up to 25% of your compensation or $61,000 for 2022.
In addition to reducing your taxable income, your contributions to a SEP, Keogh, or traditional IRA will compound interest while deferring tax.
You also have until April 18th to contribute to a Roth IRA, these contributions are not tax deductible, so there are no immediate tax benefits, but it’s still something you may want to consider.
Another available option for lowering your taxable income is to contribute to your health savings account (HSA) before April 18th. You will, however, need a high-deductible plan to do this. The 2022 contribution limit is $3,650 for individuals and $7,300 for families with catch-up contribution limits set at $1,000.
2. Make an Estimated Tax Payment To Avoid Q4 Penalties
If you didn’t pay the IRS enough in quarterly taxes throughout the year, you may be looking at a big tax bill come filing time. This could also include significant interest and penalties.
According to IRS regulations, you have to pay 100% of last year’s tax liability or 90% of this year’s tax, or you will be liable to pay an underpayment penalty.
If your adjusted gross income for the prior year was more than $150,000, you have to pay more than 110% of your prior year’s tax liability to be protected from a tax year 2022 underpayment penalty.
However, if you make an estimated fourth quarter payment by January 17, you can erase any penalty for that quarter, saving you both money and stress.
It’s also worth remembering that if you didn’t send in any estimated payments for other quarters, you’ll still owe penalties for those time periods.
3. Organize Your Records for Tax Time
There are a number of benefits to having your records organized. Not only will you avoid wasted time and frustration, you’ll also ensure that nothing important slips through the net.
Keeping your records in order means having the appropriate documentation to determine if you qualify for certain deductions. For instance, there are specific guidelines around claiming tax benefits from charitable donations. You’ll want to be aware of these guidelines.
If you follow the steps below, you’re more likely to be organized and to minimize your tax liability:
- Print out a tax checklist. This will help you gather all the tax documents you’ll need to complete your tax return without missing anything.
- Keep all tax information. Most statements and tax forms such as W-2s, 1099s and mortgage interest statements are issued around January 31st. Be sure to keep all tax-related documents, even if they don’t look important, you may need them.
- Collect receipts and information. Keep any relevant receipts that have piled up throughout the year. This might be for donations you made to charities, business expense receipts, or any other kind of expense. You should also have your federal and state returns on hand from the prior year.
- Know the price you paid for any stocks or funds you have sold. If you don’t know what you paid for stocks or funds, contact your advisor before you start preparing your tax return to get this information.
- Be aware of income from rental properties. Rental income counts just like business income, and you’ll need to have this information organized, ready to report.
- Check whether your tax-free municipal bonds are free of taxes or not. Municipal bonds are generally free from federal tax. Whether they are free from state tax will depend on if you are filling in the state where the bond was issued. Either way it will need to be reported, so check with your tax partner to learn what documentation you may need.
- Make sure your expenses and payroll records are up to date. If you’re a business owner, you, or your team, will need to have accurate payroll records and have documented appropriate business expenses for the 2022 business year.
4. File on Time
This final tip is a simple, yet crucial step if you want to avoid hefty fines. You must either file your federal taxes or file for an extension by April 18, 2023. State tax filing deadlines vary however, so you should always double check your deadline with your state’s department of revenue. You can find more information here.
In the event that you have applied for a filling extension, you must still pay your estimated taxes by the April 18th deadline.
Even if for some reason you don’t think you can pay your entire tax bill, you should still file on time. This will help you avoid fines and then allow you to work out an installment plan with the IRS.
Bonus Tip: Start Planning for 2024 Now!
Being ahead of the curve with regards to taxes can save you time, money, and stress. Here are some simple steps you can take to be more prepared for 2024:
- Familiarize yourself with important updates. Tax laws and regulations can, and do, change regularly. Make sure you are aware of any changes the IRS has made for the 2023 tax year. These could include changes to tax brackets, deductions, and credit updates.
- Make sure your tax withholdings are accurate. If you receive a paycheck from your employer, double check your withholdings have been done correctly.
- Pay estimated taxes on-time. If you are self-employed, own your own business, are a partner, or a shareholder make sure you pay quarterly estimated taxes on time to stay on-top of your tax bill and avoid penalties.
The key thing to remember when it comes to tax is to act early and seek support where needed. Following the above steps can help you save money at tax time and stay in control of your finances.
Our Entrust Wealth Partners team can help you through any questions you may have as you work with your tax professional to prepare your 2022 tax return. Contact your advisor or reach out to us at (860) 838-3730 to get started.
Content in this material is for general information only and 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.
This material was prepared by Courtney Henry Consulting.