As you’re filing on your 2021 tax return, you’re probably already contemplating things you can do to save on taxes in 2022. Although it may be too late for most of these tips to help with your current return, you can plan now for better savings and more deductions when you file next year. Here are four tips to save on taxes.
1 Max out your annual retirement savings
According to changes to retirement plans for 2022 announced by the IRS, the 2022 contribution limit for 401(k) plans will increase to $20,500. Limits on contributions to traditional and Roth IRAs will remain unchanged at $6,000. Be sure to take advantage of any matching 401(k) contributions offered by your employer. If you’re not already maxing out the matching contribution, speak to your employer to increase your contribution.
Taxpayers can also deduct contributions to a traditional IRA if they meet certain conditions. If neither the taxpayer nor their spouse is covered by a retirement plan at work, their full contribution to a traditional IRA is deductible based on income limitations. If the taxpayer or their spouse was covered by a retirement plan at work, the deduction may be reduced or phased out until it is eliminated. The amount of the deduction depends on the taxpayer’s filing status and income. Tap for details on the IRS IRA income phase-out ranges.
Taxpayers aged 50 or older can also make a catch-up contribution. This is an additional contribution to 401(k) accounts and IRAs. The annual catch-up contribution for individuals who are 50 or older at the end of the calendar year is $6,500. Tap to learn more about catch-up contributions.
2 Take advantage of an HSA or FSA to save on taxes
Starting a Health Savings Account (HSA) is another way you can save on taxes. An HSA enables you to save money, tax-free, to be used for possible medical expenses. It is available to people who have a high-deductible health plan. It allows for contributions using pre-tax dollars when using payroll deductions. You can also make contributions directly into your account that could be tax-deductible. Your account grows tax-free, and you can pay for qualified healthcare expenses on a tax-free basis. Furthermore, there’s no use-it-or-lose-it rule. The balance rolls over from year to year and your HSA stays with you even if you change employers. The IRS announced that the 2022 limits for HSA contributions are $3,650 for employee-only and $7,300 for family coverage. That’s a slight increase over 2021.
A Flexible Spending Account (FSA) also allows people with health insurance to set aside money for qualified medical expenses. Similar to HSAs, there is a limit on what you can set aside. In 2022, you can contribute up to $2,850 and your spouse can contribute the same amount if your employers offer it. The big difference is that the money put into an FSA may not roll over. You will lose it at the end of the year unless your employer has selected a rollover option. Your employer must offer an FSA for you to take advantage of it.
3 Start a Coverdell Education Savings Account (ESA)
An ESA is a great way to save for educational expenses for children or grandchildren. It is a trust or custodial account set up to pay qualifying education expenses for a designated beneficiary of the account. The benefit applies to qualified elementary, secondary, and higher education expenses. Anyone can set up an account for a designated beneficiary as long as the beneficiary is under the age of 18. Any individual whose modified adjusted gross income is under the limit set for a given tax year can make contributions. While contributions are not tax-deductible, designated beneficiaries can receive tax-free distributions to pay qualified education expenses. Tap to learn more about opening a Coverdell Education Savings Account at Choice One Community Credit Union.
4 Adjust your W-4
You complete a form W-4 so that your employer can withhold the correct federal income tax from your pay. Many employees never bother to adjust it for life changes. You should complete a new W-4 as your personal or financial situation changes. If you want to increase your paycheck, claim more allowances to withhold fewer taxes. Alternatively, if you’re looking to increase your tax refund, claim fewer allowances to withhold more taxes. Here are some reasons you may want to adjust your W-4: You started a side job, you owed a lot in taxes last year, you received a big refund, you got married, divorced, or had a baby. If you want to adjust your W-4, simply complete a new form, and give it to your employer.
We hope our tips give you some helpful ideas to save on taxes this year and improve your financial position. Learn more ways to save this year by reading our blog “6 Financial Resolutions for 2022” or “6 Tips to Manage Rising Costs”.