Last-Minute Tax Deductions and How to Prepare for Next Year
With the tax deadline fast approaching, it’s easy to feel unprepared and overwhelmed. But it’s not too late to take advantage of some last-minute tax tips for 2023 that can help you save money and maximize your return this year.
Whether you’re an individual taxpayer or a business owner, you can benefit from several strategies that allow you to take advantage of all available deductions and credits. By following these tips, you can alleviate some of the stress and uncertainty that comes with tax season and feel more confident that you’re making the best financial decisions for your situation.
One of the first areas to look at are your retirement contributions for this tax year. Taxpayers can make deductible contributions up until the tax-filing deadline (April 18, 2023 for 2022 taxes).
Traditional IRAs offer potential tax savings, with total contributions for both traditional and Roth IRAs up to $6,000 for the year for those under 50, or $7,000 for those 50 and older. These contributions may be limited, though, if covered by a workplace plan or if your income exceeds certain levels.
Deductible contributions can yield significant tax savings and are one of the best ways to keep some additional funds in a time of high inflation, thanks to the long-term benefits of these types of investments. For instance, a $6,000 contribution could save $1,800 in taxes for someone in a 25% federal and 5% state tax bracket.
Be Mindful of Credit Changes
There have been several tax changes over recent years, so it’s important to understand what’s new for 2023 and where these could impact you. Many benefits like the Child Tax Credit (CTC), Earned Income Tax Credit, and Child and Dependent Care Credit are returning to 2019 levels for 2022 tax returns. Some key updates to tax credits this year include:
- Eligible taxpayers who received a $3,600 per dependent Child Tax Credit will get $2,000 per dependent for 2022.
- For Earned Income Tax Credit taxpayers, those with no children who received a $1,500 credit previously will now get a maximum of $530 in 2022.
- The Child and Dependent Care Credit returns to a maximum of $2,100 in 2022.
Take Capital Losses
If you sold any stocks at a loss in 2022, you can use this to your advantage when filing your taxes. To make the most of this, you must first sell the stock at a loss, known as “realizing” a loss. From there, you can use this loss to offset any realized capital gains you had in 2022.
Excess loss of up to $3,000 for 2022 can be used to offset your ordinary taxable income. However, you must not complete a “wash sale”, where you buy back the same or near-same investment within 30 days before or after taking a tax loss for that investment. But using capital losses to offset your capital gains can be an excellent way to lower your overall tax liability for the year.
Filing your taxes can be stressful, so following a few practical measures can help make the process quicker and more straightforward.
Filing your return electronically is always free for individual tax returns and is easy to do on the IRS website. Before submitting your return, check your identification numbers (like your Social Security Number), and always double-check your figures before sending in a payment.
If you choose to file a paper return, check the tax tables to ensure you’ve followed the instructions correctly. You’ll also want to double-check the mailing address for your return.
Sign and date all forms, both paper and electronic, and submit any payments electronically or via mail. If you need an extension, you can request one online if needed.
Prepare for Next Year
If you find yourself on the line between two different tax brackets, you may want to consider deferring some of your income until the following year. This could mean asking your boss to give you a raise after the first paycheck of the new year or, if self-employed, sending invoices after January 1.
Waiting until January to sell any investments or your home, which would result in a capital gain, can also help you defer some of your income for the year. Combined with contributing to tax-advantaged retirement accounts, these strategies can significantly lower your taxable income for 2022.
Bunching expenses is a strategy that allows you to reduce your taxable income by increasing your eligible deductions for the tax year. Even if you’re not a business owner, you can still benefit from a number of expense deductions, like medical or charitable donations, in a single year by itemizing these deductions on your tax return.
To claim a deduction for medical or dental expenses, they must exceed 7.5% of your adjusted gross income. If you’re trying to save money next year, prepay for medical procedures until you reach the 7.5% AGI threshold. This might include paying for braces upfront, future chiropractic adjustments, physical therapy appointments, buying contact lenses in bulk, or prepaying for LASIK treatment.
You can also prepay tuition for private or higher educations or increase your annual charitable contributions to make use of this benefit.
Buy a Home
While buying a home is an exciting life milestone for many reasons, it also comes with a number of tax benefits too.
Mortgage tax deductions are one of the biggest reasons to consider making a move this year, as you can deduct the interest paid on your mortgage loan, up to a certain amount, from your taxable income. Especially in the early years of your mortgage, where most of the payment is going to the interest rather than the principal, this is a great strategy to use.
You can also deduct the property taxes you pay on your home, which can be valuable if you live in a state with high property taxes. If you run a business, you can deduct a portion of your home used exclusively for business with the home office deduction, along with a portion of your mortgage interest, property taxes, utilities, and repairs.
Capital gains exclusions allow taxpayers to exclude up to $250,000, or $500,000 for married couples) of the profit from a home sale from taxable income, so long as the home was a primary residence for two of the last five years.
Energy-efficient home improvement credits are also popular. If you make certain energy-efficient updates to your home, like installing solar panels or a geothermal heat pump, you may be eligible for both federal and state tax credits.
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Every taxpayer’s financial situation will look different. Not all of these strategies will be right for everyone, but speaking with an experienced tax professional or financial advisor will help determine what’s right for you.