- Brooke Horvath
Do the work now to lower your tax due next year.
It's that time of year that people start to think about tax planning - and if you aren't then you should be! Once that clock ticks midnight on 12/31, there's not much you can do about your tax liability. Here are a few simple ways to reduce your tax liability and pay the IRS less.
Contribute to a retirement plan
his may be our favorite way to reduce your tax liability because it helps you now and in the future. If your employer offers a 401(k) and you aren't in it, then drop what you are doing and SIGN UP RIGHT NOW. Retirement plans are usually based on pre-tax earnings, which means the more you contribute the more you lower your taxable income. The biggest perk here Most employers offer a match for any money that you contribute, so if you are not in your job's retirement plan you are missing out on free money. Recent studies have found that Americans should be saving 15% of their pre-tax earnings each year.
Sign up for a flexible spending account (FSA)
A flexible spending account is another way to lower your pre-tax income. By utilizing an FSA, it's basically a piggy bank for medical or child care expenses during the year. This is another good way to save because it is likely money that you are going to spend regardless. You set up the amount you want withheld from each paycheck and then use that account when making medical purchases or paying for daycare expenses. You can use pre-tax monies, basically "saving your tax rate" on these expenses. Here are the limits for 2022 contributions - https://fsastore.com/learn-new-fsa-contribution-limits.html
Use business deductions
Small business owner's have an advantage when it comes to making changes to your income that will directly affect your taxes. You can make decisions that directly lower you bottom line, thus lowering your tax due. So if you are going to have a "good year" and want to avoid paying in more than usual, now is the time to make those improvements, buy that new piece of equipment, or give out holiday bonuses. Here are 29 deductions to consider in 2022. The one thing I always caution business owners about is financing a piece of equipment for this type of expense - then you are paying for it over several years but only getting tax benefit in the first (assuming you take 100% of depreciation). It's usually a good idea to have your cash outflows match your tax deductions.
Have a CPA do your taxes (& talk with them throughout the year)
This is not a sales pitch. Working with a CPA on your taxes is a serious advantage to you. CPAs have devoted countless hours to better serve you. CPAs have five years of college education with many of those focused solely on business and accounting, have to sit through a rigorous test of not only skills but perseverance, and have continuing education every year. CPAs are also monitored for ethics by both state and national organizations. By working with your CPA throughout the year, they can help you tax plan for any major event - which is what we highly recommend. Once the deal is done, it is often times too late to change much for tax purposes. Additionally, CPAs can share tidbits of information that you may not think about - and help you be penalty proof when filing your return.
There are also some ways that we hear every year from clients that simply do not work for the majority of tax payers.
Gifts to Charity
While these are taxable deductions, the tax benefit is probably not as great as you think. In the COVID years, there was a direct benefit for tax payers for up to $600 MFJ for cash contributions, but as of today, that deduction has not been extended. This means that you have to have total deductions of over $12,950 single or $25,900 married filing joint for these to count. So if you want to give out of the goodness of your heart, please do so (and keep those receipts for state filings!), but it probably will not give much benefit to your federal taxes.
Unreimbursed employee expenses
Gone are the days of this expense unless you are a qualified employee or eligible educator. These deductions became vastly unavailable with the Tax Cuts and Jobs Act in 2017. Most people that are still saving receipts are thinking about the "good ole days" when you got to claim this 2% AGI deduction.
Deducting mileage and actual vehicle expenses
This is simply not allowed. The IRS considers this double dipping and is something we have to explain to tax payers every year. Here's my favorite article on the subject: https://www.thebalancemoney.com/standard-mileage-rate-vs-actual-expenses-2125242