This year’s tax deadline is just around the corner. So, if you haven’t filed your 2022 taxes yet and are not planning on filing an extension, now’s the time. Actually, even filing for the extension is due on the same day. While the idea of doing your taxes at the last minute might seem daunting, there are still a few ways to reduce your tax bill before the deadline. That being said, we’ll also include tips on planning ahead for next year. It’s by planning far ahead that you’ll be setting yourself up for success (and probably less stress) at this time next year!
It’s About Time
April 18 is this year’s deadline for submitting 2022 tax returns. Taxpayers who request an extension by that date will have until October 16 to file their returns.1 Keep in mind that any taxes due will already be due on April 18, so that’s also when any penalties or interest would start accumulating. Hopefully you don’t already know this, but the IRS is not so shy about penalties.
Now, if you were affected by Hurricane Ian, the IRS has made some adjustments on dates that you should know about.2 You’ll find additional details about this, along with info on casualty losses, in our recent blog called Tax Extensions After Hurricane Ian.
Your Old Friend, IRA
As most of the strategic tax moves need to be made during the tax year—by the end of December 2022 for last year—the options for eleventh-hour actions are actually fairly limited. However, one standard go-to move to consider is contributing to a retirement account before the tax deadline. Additional contributions made to a Traditional IRA or a SEP IRA can still be claimed as a tax deduction on your 2022 tax return, within specific limits, potentially reducing your tax bill. Contributions made to a Roth IRA aren’t tax-deductible, but the earnings on your contributions can grow tax-free. Then, during retirement, certain qualified withdrawals in retirement would also be tax-free.3 Be sure to check with a financial advisor and your tax professional to ensure that you’re contributing within the limits and, equally important, that your retirement account strategy aligns with your overall financial plans.
401(k) Options at the Finish Line
Most 401(k) contributions are withheld from employee’s paychecks, so the deadline for these contributions likely passed at the end of 2022. However, there are a couple of related considerations you might want to explore. Some of these have to do with reporting requirements and not ways to “save” on taxes. Still, avoiding penalties or other IRS-related complications is always going to save you time, and possibly money.4
• Corrective Distributions: If you already received a corrective distribution in 2023 for whatever reason, you might need to report the distribution on your 2022 tax return.
• Required Minimum Distributions (RMDs): If you turned 72 during 2022, you might have to take your first RMD by April 1, 2023. RMDs are generally taxable and should be reported on your 2022 tax return. However, this only applies if you have reached the age where RMDs are required. By the way, as of the beginning of 2023, the new age at which RMDs start is 73. This would only matter to you if you turned 73 on January 1 of this year, or later.5
Check Your Work
There’s a double meaning to “work” here. First, make sure that everything that is work-related has been accounted for in your tax preparations. For example, if you are self-employed (or run your own business) and any part of your home is used exclusively, and on a regular basis, as a home office, a percentage of your rent, lease, or mortgage will be deductible.6 There are several ways to handle this, so be sure to consult with your tax professional on this.
The other meaning of “checking your work” is, of course, making sure that you haven’t missed anything. When doing something that isn’t one’s favorite thing—like doing taxes—it is natural to rush or get distracted. Go through everything a few times to make sure you’re reporting everything correctly and not leaving any deductions unclaimed. Don’t forget: errors in tax returns can lead to processing delays or, in some cases, potential audits.
The Early Bird
Some tax-related tips are better implemented earlier in the year. Charitable donations should be made earlier in the year to maximize their tax benefits. Retirement contributions could also be made earlier in the year to benefit from compounding returns (always a good thing). This would also provide more time to adjust contributions based on financial situations. Hiring a tax professional or doing taxes earlier in the year can help identify deductions and credits, plan tax strategies, and avoid last-minute stress.
By taking a proactive approach to taxes, you improve your chances of saving money, reducing stress, and avoiding penalties and interest charges. It’s important to consult with a tax professional or the IRS website to determine eligibility for these credits.
A Tip for Generations
While this tip will not reduce your taxes for your 2022 returns, it’s still a valuable suggestion to consider. Gifting can have tax benefits in general, and if you have a college graduate in your life, consider gifting them with something that will help them with their financial planning and potentially build generational wealth. This could include a subscription to a financial planning service, help with setting up a retirement account, or even contributing to their student loan payments.
Another idea is to connect them with a trusted financial advisor to make sure they’re well educated in the important aspects of wealth management. By giving a gift that helps them build a foundation for their financial future, you’ll be making a lasting impact on their lives and potentially on future generations. Keep this in mind as you plan your taxes and gifts this season.
The Takeaway
Spring is a great time for enjoying life to the fullest. For most, this does not mean staying inside and doing last-minute taxes. Just as we encourage all investors to do long-term planning, the same applies to taxes. The more in advance you start working with your financial advisor and tax professional, the greater your number of options for reducing your tax burden in the long run. So, if you’re able to take advantage of some of these eleventh-hour tips this year, fine. But what would be even better is to start your 2023 tax thinking sooner than later, too.
Sources:
1 https://www.irs.gov/newsroom/irs-sets-january-23-as-official-start-to-2023-tax-filing-season-more-help-available-for-taxpayers-this-year
2 https://www.irs.gov/newsroom/irs-announces-tax-relief-for-victims-of-hurricane-ian-in-florida
3 https://www.irs.gov/retirement-plans/plan-participant-employee/retirement-topics-ira-contribution-limits
4 https://www.irs.gov/retirement-plans/401k-plans
5 https://www.irs.gov/retirement-plans/plan-participant-employee/retirement-topics-required-minimum-distributions-rmds
6 https://www.irs.gov/publications/p587
Additional Source: “7 Things You Can Do to Trim Your 2023 Tax Bill”; 2023 article from FMeX
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