The most effective tax planning is done during the year and actions must normally be taken before December 31st. But with the April 17th deadline approaching, there are still a few things you can do to save on your 2022 taxes. Here are some tax savings ideas for 2022 you can still make.
IRA Contribution
If you have “earned” income and your total adjusted gross income is below certain amounts, you can make a contribution to a tax-deductible IRA. The maximum IRA contribution you can make is $6,000 ($7,000 if you are age 50 or older). You (or your spouse if married filing jointly) must have earned income (W-2 income or self-employment income) and your income must fall below certain amounts so you aren’t phased out from this deduction. As a result, this needs to be planned carefully. The deadline for 2022 contributions is April 17, 2023.
Roth IRA Contribution
While contributions to a Roth IRA do not save taxes today, earnings and distributions are tax-free when you pull them out for retirement as long as you’ve held the Roth for at least 5 years and make qualified distributions. These can make great financial planning strategies for retirement. The contribution limits are the same as the Traditional IRA above, but the income limits before getting phased out are a bit higher. So, if you can’t make a contribution to a regular IRA, you might qualify for the Roth. The deadline to contribute for 2022 is April 17, 2023.
Back Door Roth IRA
If your income is too high to make a regular contribution to a Roth IRA, it may be possible to implement a strategy known as a “back-door Roth”. The basic idea is you contribute to a traditional IRA, the contribution is nondeductible because your income is too high, and then you convert it to a Roth IRA. It is important to realize this works only if you have no other IRAs, including traditional IRAs, SEP IRAs, or SIMPLE IRAs. Like the IRAs above, the deadline is April 17, 2023.
SEP IRA
The SEP IRA is for employers and self-employed taxpayers. It is similar to a regular IRA but the amount you can contribute can be much larger, and the deadline is the extended deadline of your tax return. That means you could make these contributions as late as September 15th if you are a corporation, or October 15th if you file your business taxes as a sole proprietor. The maximum contributions are based on the income from your business, and you must include all eligible employees, if any.
HSA
The Health Savings Account is a great way to save on taxes for medical expenses. We see many clients miss out on this deduction when they participate in pre-tax deductions through their employer but think they cannot make additional contributions on their own. You must be covered under a high deductible health plan that is HSA qualified and you can’t have other health coverage including Medicare. The limits on contributions range from $3,650 to $8,300 depending on whether you have self-only coverage versus family coverage, and whether you are under age 55 or aged 55 and older. While there is a requirement that distributions must be used to cover medical expenses, this is a fantastic way to save on taxes. The deadline for contributions to count toward your 2022 tax return is April 17, 2023.
These are just a few last-minute tax savings ideas for 2022. Tax planning is much more effective with many more options available during the year. If you would like to schedule tax planning sessions for this summer or fall, please contact us. We have both one-time and monthly payment plans available.
