The new year has just started, but it is never too early to review your financial plan to meet your 2022 financial goals. Now is the perfect time to take steps to reduce your 2022 tax obligations, according to Dan Mathews, a Certified Financial Planner professional.
Five strategies that may reduce your 2022 taxes include:
• Maximize your health savings account. Health savings accounts (HSAs) are a great way to put money aside and reduce your taxable income. For 2022, you can contribute $3,650 for individual coverage and up to $7,300 for family coverage. You don’t have to use the money in these accounts by the end of the year; in fact, the money can be invested to maximize growth until your retirement.
• Optimize your 401(k). Most 401(k) retirement plans are tax-deferred, which means you don’t pay taxes on the money you put in, or gains on that money, until you withdraw the money. Good news for individuals with employer-sponsored 401(k) plans: The contribution limits have increased to $20,500 for 2022, with a catch-up contribution of $6,500 for those age 50 and older. Also, consider rebalancing your portfolio this year so it aligns with your acceptable level of risk.
• Plan your payments. People who withhold federal tax from their income generally make one tax payment with their annual federal income tax return on or before the mid-April tax deadline, if they didn’t withhold enough tax for the tax year. But some people, such as the self-employed or retirees, may need to pay estimated taxes quarterly. One way to avoid paying penalties when you file your federal tax return is to ensure your tax payments in 2022 exceed 90% of your 2022 estimated tax liability. For those making estimated payments for 2022, the key payment-due dates are April 18, 2022; June 15, 2022; Sept. 15, 2022; and Jan. 16, 2023.
• Gift your stock to charity. You can gift highly appreciated stock as a charitable donation in 2022. A gift of appreciated stock is an itemized tax deduction, and the charitable organization will not have to pay tax on the capital gain. “You can then repurchase the stock with the cash you would have otherwise donated as an effective way to raise the cost basis in your portfolio,” Mathews explains.
• Think long term. Many people neglect estate planning, but making a resolution to create or update a will is a smart strategy for 2022, Mathews emphasizes. Estate planning helps ensure that your wealth is distributed according to your wishes. This may include charitable giving and considerations for family members. In the short term, you may gift up to $16,000 per person in 2022 to as many people as you want without being subject to either gift tax or IRS filings, he adds.
Working with a CFP professional can help you make the most of tax strategies relevant to your situation. Visit LetsMakeAPlan.org for more information about taxes and other financial-planning strategies.