Make a Contribution to a Retirement Account
An easy way to reduce taxable income—even at the last minute—is to put more money into your retirement account. Depending on the type of account you have, the contribution may be deductible.Open a Health Savings Account
A health savings account (HSA) offers a way to reduce your taxes by letting you deduct the amount deposited. When opening an HSA, you must have a separate, high-deductible health insurance (HDHP) policy. The Internal Revenue Service determines the deductible amount for medical purposes. For 2022, they are as follows: $1,400 for an individual and $2,800 for a family.Like other retirement accounts, there are limitations on how much you can deposit per year. Contribution limits are $3,650 per year for an individual and $7,300 for a family.
An HSA also serves as a way to save for retirement because it builds interest tax-free. Any money used for qualified health purposes is tax-free. A penalty of 20 percent occurs on money that is not used for health reasons until you turn 65. At that time, you can get withdrawals for any purpose without a penalty. Taxes must be paid when you make a withdrawal.
A HSA is best used by someone who is young and in good health and has family members that are also in good health. Ideally, you will want to have enough income to cover most of your medical expenses without making withdrawals from your HSA.
Make a Contribution to Charity
You can also reduce income tax by making charitable donations. Organizations devoted to helping people always appreciate donations. You must get a receipt for any donation made to receive a tax deduction.You can make charitable deductions from your payroll, cash, checks, or goods. Most likely, it will be necessary to itemize to claim the deduction.
Sell Losing Stock
You can reduce your capital gains tax by selling your stock that did not perform well in 2022 and selling it for a loss. Then, use that loss to offset your wins. You can reduce capital gains by your losses—dollar for dollar, says TurboTax.Defer Income Until Next Year
If you expect some pay before the end of the year—such as a bonus—that might put you into the next tax bracket, ask them to hold it until next year, TurboTax suggests. It will enable you to pay fewer taxes this year, but it will not work if you expect to make more money next year than you did this year.Qualify for the Saver’s Credit
The Saver’s Credit enables people with retirement accounts to deduct a credit of up to $1,000 from their taxes. As a credit, it does much more than just give you a lower adjusted gross income (AGI), it also lowers how much you owe in taxes. Not everyone can qualify, but if you have a qualified retirement account (401(k), 403b, IRA, etc., and have lower amounts of income, you can receive a nonrefundable credit.Single people cannot have an AGI above $20,501 to receive 50 percent of their contribution up to $2,000. The maximum income they can have is $34,000 to get a pro-rated amount.
Interest on Student Loans
If you have paid interest on your student loan this year, you can use it to lower your taxes. NerdWallet says you can deduct as much as $2,500 of that interest—but you will need to itemize to get a deduction.If you are single and made more than $70,000 or more than $140,000 if filing married jointly, you cannot claim the deduction. Married people filing separately cannot claim it, and neither can dependents on someone else’s tax return.
Now that it is really close to the end of the year, you need to move fast to apply these income tax reduction strategies. They will work. Using more than one of them will reduce your taxes even more.
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