If you’re like most Americans, you’re always looking for ways to reduce taxes on your income. It’s smart to plan now for next year’s tax filing. While taxes are hard to avoid, there are certain tactics to help you keep more money in your pocket and pay less to the government. Here are a few strategies to save on taxes.
Beef up your retirement account
Investments made into certain retirement accounts, such as 401(k)s and IRAs, with pre-tax contributions are tax-deferred. This means you are able to postpone paying taxes on the amount contributed to the account and the earnings generated as long as the funds stay in the retirement account. When you begin to withdraw funds in retirement, you will need to pay taxes.
Maxing out your tax-deferred retirement contribution is a great way to reduce your taxable income and save more on taxes now. Those who do not have a retirement plan at work can save on taxes by contributing up to $6,000 ($7,000 for those 50 and older) to a traditional IRA. The IRS recently announced changes to retirement plans for 2022. Tap to learn more. This includes an increase in the 2022 contribution limit for 401(k) plans.
Understand the impact of capital gains
Understanding the difference between long-term vs. short-term capital gains can help you save when it comes to taxes. When you sell a capital asset, such as a stock, bond, or real estate, for more than its original purchase price, it results in a capital gain. The tax that you will be required to pay on the capital gain depends on how long you hold the asset before selling.
Long-term capital gains are made on assets that are held for more than one year before selling. For 2022, the capital gains tax rates are either 0%, 15%, or 20% for most assets held for more than one year. Short-term capital gains tax rates on most assets held for less than a year are taxed just like your ordinary income. That was up to 37% in 2021, depending on your tax bracket. If it’s possible, holding on to your asset for a year or longer can help you qualify for the long-term capital gain tax rate.
Tap to read specifics from the IRS on capital gains and losses.
Save for medical expenses using an HSA
Another of our strategies to save on taxes is to contribute to a Health Savings Account (HSA). An HSA is a type of personal savings account you can set up to pay certain health care costs. It allows you to put money away and withdraw tax-free, as long as you use it for qualified medical expenses. This might include healthcare deductibles, medical treatment, prescriptions, co-pays, and more. You’re eligible to contribute to an HSA when you are covered by certain high deductible plans. The maximum annual contribution to an HSA for an individual is $3,650 in 2022. For a family, it is $7,300. Tap to learn more specifics about HSAs from the IRS.
Tax credits, savings plans, & other benefits for education
Taking advantage of tax credits and tax deductions for education can help you reduce the amount of income tax you have to pay. According to the IRS, an education credit may be claimed if you, your dependent, or a third party pay for qualified expenses for an eligible student enrolled at an eligible educational institution. The eligible student must be you, your spouse, or a dependent you list on your tax return.
There are two types of education credits available: the American Opportunity Tax Credit and the Lifetime Learning Credit. Find complete details about Tax Benefits for Education in IRS Publication 970.
A 529 Plan is a tax-advantaged savings account designed to be used for the beneficiary’s education expenses. The funds in a 529 can be used for educational expenses for college, k-12 tuition, and even student loan repayments. As long as the funds stay in the account, no income tax will be due on earnings. When money is withdrawn to pay for qualified educational expenses, those withdrawals may be federal income tax-free, and in many cases, free of state tax as well.
A Coverdell ESA (Education Savings Account) can be used to pay either qualified higher education expenses or qualified elementary and secondary expenses. Income limits apply to contributors. The total contributions for the beneficiary of the account can’t be more than $2,000 in any year. Contributions to a Coverdell ESA are not tax-deductible, but amounts deposited into the accounts grow tax-free until distributed. Distributions are also tax-free as long as they are used for qualified educational expenses.
Tap to learn more about qualified expenses for 529 Plans and Coverdell ESAs.
You Credit Union can help you with tax-free saving options
Guthrie Community Credit Union can help you better plan for the future and save on taxes with a tax-advantaged IRA. GCCU members can open a Traditional IRA or Roth IRA. We hope you will take advantage of our strategies to save on taxes to better prepare yourself for tax time.
Read more helpful information like this each month on the GCCU blog. Check out our “22 Tips to Boost Your Savings in 2022.”