6 Tax Minimizing Strategies for End of Year Returns
Updated: Apr 5
Tax minimizing strategies are a surefire way to help minimize stress in tax season. It’s been said, “People who complain about taxes can be divided into two classes: men and women.” We all can respect the idea of taxes and our patriotic duty, but we also would feel just as patriotic by paying a little less. In this article we help you to think through some end-of-year tax issues and look at 6 tax minimizing strategies to help reduce those stress levels.
Simple Stress Reducing Tax Minimizing Strategies To Guide You Through The Tax Season
There are a few simple strategies you can take to minimize the stress of tax season Including:
Being organized and proactiveness - this will greatly reduce your stress
Filing documents - such as tax forms, receipts, invoices, etc as you receive them and keep them in a secure place.
Enlisting the help of a tax professional can also assist in reducing stress.
How Can a Tax Professional Reduce Tax Stress?
A tax professional support you and reduce tax stress by answer key questions regarding tax strategies that may apply to you. This could result in major tax savings for you and your family. Below are 5 tax minimizing strategies for you to consider as you wrap up your 2021 end of tax returns and plan for the following year 2022 returns
6 Tax Minimizing Strategies for Stress Free End of Year Tax Returns and How to Plan For The Next Years Returns
1. Funding Retirement Plans (401k, 403b, SEP, Simple IRA, etc)
Contributions limits will vary based on age and the type of plan you contribute to. For 401(k) and 403(b) plans the IRS increased the contribution amount to $20,500 for 2022. The catch-up contribution for participants aged 50 and older remains $6,500.
You might also consider making charitable gifts to loved ones. For 2022, you may gift $16,000 per person to as many people as you like without being subject to gift tax and IRS filings. This would reduce the value of your estate.
If you don’t have a Retirement Plan through work, you should consider funding a traditional IRA, or a Roth IRA. By funding a Traditional IRA you may receive a tax break by contributing up to $6,000 ($7,000 for those 50 and older) in 2022. You may be able to deduct some or all of your traditional IRA contribution from taxable income, depending on your income.
2. Tax Payment Strategies
If you pay federal estimated taxes in 2022, monitor your tax payments. This will help you ensure that you exceed 90% of your 2022 estimated liability or 100% (or 110% for certain taxpayers) of your 2021 tax liability to avoid underpayment penalties. Estimated tax payments are due quarterly and those dates are:
April 18, 2022
June 15, 2022
September 15, 2022
January 17, 2023
3. Maximize Health Savings Account (HSA) Contributions
You can contribute up to $3,650 for individual coverage and up to $7,300 for family coverage into an HSA for 2022. If you do not withdraw from your HSA account for current medical expenses, you can allow the account to accumulate (Remember that an HSA is not a “use or lose it” benefit). Once your balance is sufficient, you can invest the cash inside the HSA in and effort to generate more growth. (A great way to generate tax-free income in early retirement is to withdraw from the HSA prior year medical expenses. Be sure to keep detailed records)
4. Charitable Giving
There are many different ways to make charitable contributions. Gifting of highly appreciated stock is a great way to reduce taxes. As opposed to gifting cash, you can gift the stock and received 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 originally had intended on gifting and increase your cost basis in that holding.
5. Claim Tax Credits
There are a lot of IRS tax credits that reduce taxes, such as the Earned Income Tax Credit. For tax year 2021, a low-income taxpayer could claim credits up to $7,728 with three or more qualifying children, $5,980 with two, $3,618 with one, and $543 if none. (For 2022, the credit rises to $6,935 for three or more kids, $6,164 with two, $3,733 with one, and $560 with none.)
The American Opportunity Tax Credit offers a maximum of $2,500 per year for eligible students for the first four years of higher education and the Lifetime Learning Credit allows a maximum 20% credit for up to $10,000 of qualified expenses or $2,000 per return.
There is also the Saver’s Credit for moderate and lower-income individuals looking to save for retirement; individuals can receive a credit of up to half their contributions to a plan, an IRA, or an ABLE account.
6. Consider Roth Conversions
This part may be confusing for many people who are looking for ways to minimize taxes. If you convert pre-tax funds in an IRA or 401k into Roth funds, you do end up paying the taxes now as opposed to in the future. Is it possible that could actually save you money in the long run?
Yes! If a couple was in a 15% ordinary income tax bracket today and at retirement they are projected to be in a 22% tax bracket, it would make a lot of sense to pay the taxes now at the lower rate so that the higher tax bracket never occurs.
Another reason to consider Roth conversions would be Social Security. When retired, Social Security can be taxable up to 85% depending on your income. If you have your income partially coming from a Roth instead of a pre-tax IRA or 401k, you may end up paying less tax on your Social Security income.
Lastly, with Medicare in retirement, if you have enough taxable income, there can be an additional surcharge and you end up paying a higher rate for the same Medicare insurance. If you go into retirement with Roth accounts, you may have an ability to avoid that Medicare penalty that people with only pre-tax accounts do not have.
Overall, these six surefooted ways to help minimize stress and taxes in 2022 offer some great ideas for consideration. Talk to your advisor today to make sure you have a plan in place to address your specific situation and needs.
Tax Minimizing Strategies – FAQs
How to avoid tax today on salary?
It is hard to avoid paying tax today on salary wages as an employee because the options are more limited and controlled by the employer greatly. The most common options for ways to avoid tax by reducing your taxable income are to contribute to a health savings accounts (HSA), make pre-tax contributions into employer plans such as 401k, 403b, 457, TSP, etc.Traditional IRA contributions, contribute into donor advised funds or do more charitable giving, and write off losses from investments in taxable accounts.
How to avoid paying taxes legally?
You can avoid paying taxes legally temporarily by putting your income into vehicles designed to allow that money to grow tax-deferred, but when you take it out in the future it is a taxable event and you’ll pay the taxes then. Another way that you can avoid paying taxes is to have a taxable income that is lower than your annual tax deductions. In that situation, you may have paid taxes up front on the income, but the investments were put into accounts such as Roth IRAs that offer tax-free growth and income distribution in the future.
What are tax savings strategies for high income earners?
Tax savings strategies for high income earners are similar to strategies for non-high income earners. The primary goal would be to max fund all pre-tax accounts available through work, and then put the additional money into types of investments that can possibly offer tax deferral of the growth and provide a passthrough of losses to offer ordinary income.
This material is being provided for informational purposes only and is not a complete description, nor is it a recommendation. There is no guarantee that these statements, opinions or forecasts provided herein will prove to be correct. Investing involves risk and you may incur a profit or a loss regardless of strategy selected. Prior to making an investment decision, please consult with your financial advisor about your individual situation. Please note, changes in tax laws may occur at any time and could have a substantial impact upon each person's situation. Raymond James and its advisors do not offer tax or legal advice. You should discuss tax or legal matters with the appropriate professional. Unless certain criteria are met, Roth IRA owners must be 59½ or older and have held the IRA for five years before tax-free withdrawals are permitted. Additionally, each converted amount may be subject to its own five-year holding period. Converting a traditional IRA into a Roth IRA has tax implications. Investors should consult a tax advisor before deciding to do a conversion.