8 Simple Ways You Can Reduce Your Tax Bill was written by Jeff Cooper and originally appeared on Have Your Dollars Make Sense. It has been republished with permission.
When it comes to tax season, getting the maximum refund possible is the goal for most, if not all, taxpayers. Are you doing everything you can to get your maximum refund? Most of us claim zero dependents on our W-9’s, maybe pay some extra taxes per paycheck, and call it a day.
Last year, the IRS received over 16 million tax returns. The average refund was about $2,306. Getting a refund like that is nothing to sneeze at; however, that doesn’t mean we can’t do better. There is undoubtedly an abundance of ways to reduce your tax burden to get the maximum refund possible for you. Below are a few suggestions from financial experts.
Myra Alport, an Accredited Financial Counselor with over 30 years of experience in the industry, has a few suggestions around giving to charities.
“The 2021 special tax break that permitted cash donations of up to $300 for single taxpayers or up to $600 for married couples has not been extended in 2022. There are a couple of ways taxpayers can get a bigger bang for their tax buck with charitable donations in 2022 as long as they are made to “qualified” public charities as deemed by the IRS.”
Myra explains that taxpayers who are 70-½ or older can make a qualified charitable distribution (QCD) from an Individual Retirement Account (IRA) to a qualifying charity. She states, “This tax-free transfer of cash or stock is permitted as long as the distribution (maximum $100,000 annually) is paid directly out of the IRA by the custodian.”
This kind of tax break can be beneficial when taxpayers must take their Required Minimum Distributions (RMD) starting at age 72.
Another charitable option for taxpayers of any age is to directly gift appreciated stock you have held for a year or longer to a charity from a taxable brokerage account. “Taxpayers will receive a charitable tax deduction for the full fair-market value of the stock at the time the gift was made.”
When using this method, gifting up to 30% of your adjusted gross income is the limit for donations.
Did you know that you can also gift stock to a relative or one of your children? It’s true. You can gift up to $15,000 of stock or $30,000 for a married couple to a relative of your choosing.
The taxes benefits here are twofold. First, the donor can avoid potential capital gains taxes from selling the gifted stock. Typically, the recipient of the stock is a retired parent or child not yet in the workforce. The reason for this is to gift the stock to someone in a lower tax bracket than yourself. Once the recipient sells the stock, they will keep more of that money than you might have.
“Contributing to a retirement account is a great way to simultaneously save for the future and lower your tax bill. If you weren’t eligible for an employer-sponsored retirement plan in 2021 but earned wages, you can make a traditional IRA contribution on or before the tax deadline (April 15, 2022) and have it count as a 2021 tax deduction.”
The maximum annual amount you can contribute to traditional and Roth IRA accounts combined is $6,000. If you are 50 or older as of 12/31/2021, this amount gets bumped up to $7,000. If your taxable wages are lower than this amount, your combined IRA contribution is limited to your total earned compensation.
Deborah’s other suggestion is more long-term. “Roth IRA contributions, although not currently tax-deductible, can be an excellent long-term tax strategy because you are not required to take any Roth IRA distributions during your lifetime. Earnings and qualified withdrawals are tax-free.”
The founder of Mercer Street Company, Ryan Firth, has another valuable way to reduce your tax bill. “If enrolled in a high-deductible health plan on December 1st of last year, the plan participant can set up a Health Savings Account (HSA) and make a contribution of $3,600 towards 2021 (plus, an additional $1,000 catch-up contribution if aged 55 or more).”
In this case, the contribution reduces taxable income, and unlike an IRA, there are no income restrictions.
Ryan also has a method for those of us that are self-employed. “A Simplified Employee Pension (SEP) IRA is also a way to achieve tax deferral, but most employers don’t offer one, however, if you’re self-employed, you can set one up. You have until the date you file your tax return to make a contribution to a SEP-IRA for the prior year.”
When it comes to tax time, there is always more we can be doing to reduce our tax burden. Donating to charities, investing in retirement accounts, or opening a Health Savings Account are just a few of the options we have. However, before doing anything with your taxes, take the time to talk to an expert to make sure you are getting your maximum refund.