“My accountant is the best, they get me more money back than my last one did.” Jimmy Lipper said to his coworker. “How do they do to get you more back?” The coworker was truly hoping for some tax secrets. “Well, you know, deductions and stuff.” He grins like he actually knows what that means and walks away. The coworker is left wondering if Jimmy’s accountant is really doing something better. Are there things individuals can do to reduce their tax liability? Yes. And you do not need a referral from someone named Jimmy Lipper to do it. Here are some more common tax deductions and credits.
401(k) and IRA Contributions. These retirement contributions are tax deductible and probably the deduction most used by taxpayers. 401(k) contributions are deducted through your employer’s payroll and the maximum deduction for 2022 is $20,500 ($27,000 if over 50). At minimum you should contribute enough to take full advantage of any employer matching benefits, usually, this is in the form of a percentage of wages per pay period. IRAs or individual retirement accounts are available for contribution deductions. The limit on IRA contributions for 2022 is $6,000 ($7,000 if you’re age 50 or older). If you are covered by a retirement plan through your employer, an IRA deduction may not be available for you, so research your options first. IRA contributions can be made by the due date of the tax return in the following tax year (4/17/2023 for the 2022 tax year), but 401(k) contributions must be made in the tax year you intend to receive the deduction.
HSAs and FSAs. Heath savings accounts and flex spending accounts are tax-deductible ways to save for health-related expenses. HSAs are available to anyone in a high-deductible health insurance plan. If your employer does not offer an HSA, you can start your own, many banks offer these accounts. The deduction limit for HSAs in 2022 is $3,650 individually or $7,300 married (an additional $1,000 available if you’re 55 or older). FSAs are similar to HSAs but only offered as part of your employer’s benefits package, so if your employer does not offer this option you should go with an HSA. The FSA deduction limit for 2022 is $2,850. Some employers also offer an FSA plan to withhold up to $10,500 for dependent care expenses from your paycheck pretax. The coverage and details of these types of plans vary depending on the employer so contact your Human Resources for any details. HSA contributions can be made by the due date of the tax return in the following tax year (4/17/2023 for the 2022 tax year), but FSA contributions must be made in the tax year you intend to receive the deduction.
Schedule A or Itemized Deductions. These are items such as health care costs, property taxes, mortgage interest paid, and charitable donations. For these deductions to be of benefit you must be able to exceed the standard deduction. For 2022 the standard deduction is $12,950 for single and $25,900 for married taxpayers. Most of these deductions also have limitations.
Other Deductions to Consider.
College savings plans, most commonly 529 Plans, may also be available for a deduction on your state return and have tax benefits if they are eventually used for qualified education expenses. The rules on these deductions vary depending on the state.
Energy credits and incentives are available as part of the Inflation Reduction Act of 2022. These are very specific, and suggest taxpayers refer to www.energystar.gov for the details.
Childcare expenses paid to certified care providers are available for deduction with limitations (tax tip – childcare expenses typically include non-overnight summer camps as well).
Educator Expense Tax Deduction allows for a $300 deduction for qualified expenses for certain jobs in education.
Selling investments at a loss (considered a capital loss) can be used to reduce other taxable income. Tax-deductible capital losses are limited to other capital gains and up to $3,000 per year to offset ordinary income. Before buying back the same investment be sure to research the “wash sale” rules because the repurchase of the same investment may disallow your losses from being tax deductible.
W-4. We would suggest that anyone that has taxes withheld from their paycheck should make sure that the amount is appropriate. Tax withholding calculators are available online, including at www.IRS.gov. This is not a credit or deduction but a payment toward tax so having too little withheld can cause a balance due on your yearly return. You can adjust your withholdings anytime during the year by filling out a W-4 form through your employer.
Planning ahead and understanding your tax situation can prevent you from paying taxes you do not owe and help you take advantage of the continually changing deductions and credits you qualify for. BKC is here to help you with any of your questions.