The choices you make with your money between now and the end of the year can have a major impact on the amount of taxes you’ll have to pay in the next year’s April filing season. This is especially important to keep in mind if you are putting money down for retirement, claiming deductions for individual expenses, or holding investments outside of a retirement plan.
However, there is not much time left. After the stroke of midnight on New Year’s Eve, it will be too late to reduce your tax burden by implementing the majority of the advice that we have included here. Check out the items on our list right immediately, and then get to work!
Be sure to check your tax withholdings
If you didn’t have enough money withheld from your paycheck during tax season this year and as a result were faced with a large tax bill, you may be able to take action between now and the end of the year to prevent a similar situation from occurring next April. Use the Tax Withholding Estimator provided by the IRS as soon as you are able to do so in order to determine whether or not you need to submit a new Form W-4 to your employer and raise the amount of taxes that are withheld from your paychecks before the end of the year.
For the purpose of estimating your income in 2022, you will need both your most recent pay stub and a copy of your tax return from 2021. If you believe that you are going to have to pay more taxes when you file your next tax return, you may use the tool provided by the IRS to determine how much “extra withholding” you need to enter on Line 4(c) of Form W-4 in order to bring your total withholding for the year up to date. Then, at the beginning of the next year, finish filling out another W-4 for withholding in 2023.
If, after deducting your withholdings and credits, your tax liability is less than $1,000, or if you paid at least 90% of the tax that was due for the previous year, you won’t be subject to a penalty in most circumstances.
Think About Paying Your Bills for 2023 Now
You probably have a very clear idea of whether you will itemize your deductions or use the standard deduction when you file your tax return for the year 2022 unless there has been a dramatic change in your financial situation. If you want to itemize your deductions or are very close to reaching the threshold, now might be a good time to prepay deductible items that are due in the following month, such as your mortgage payment or state taxes. Other steps to do before the end of the year are as follows:
Examine the charges for your medical care. It is possible that you will be allowed to take a deduction for unreimbursed medical expenditures if you have a high enough total amount. Your total unreimbursed medical expenditures can only be deducted to the extent that they are more than 7.5% of your gross income after adjustments. This puts this tax break out of reach for the vast majority of taxpayers; but, if you have exceptionally high medical costs this year as a result of a significant sickness or a chronic disease, such as long-term Covid, for example, you may be eligible for it.
In addition, there is still time to plan visits and treatments that will raise the total amount of the charges that are subject to your deductible. On the list of approved charges are things like dental and eye care, both of which you may or may not have coverage for under your insurance policy. Visit Publication 502 of the Internal Revenue Service for further information.
Make a prompt payment of the property taxes. People who itemize their deductions are allowed to deduct up to $10,000 in state and local taxes. If you haven’t already deducted the maximum amount for the year and your municipality permits it, pay the property tax payment that is due in January in December instead, and then you can deduct the amount from your taxes for 2022.
Paying for school ahead of time. You don’t have to itemize your deductions in order to qualify for this tax credit if you’re the parent of a child who will be attending college in 2022; all you have to do is prepay the tuition bill for the first quarter of the academic year. The American Opportunity Tax Credit, which can be claimed by students who are in their first four years of undergraduate education, is worth up to $2,500 for each eligible student. The credit may be claimed by students who are in their first four years of undergraduate study.
Those who are married and paying their taxes jointly and have a modified adjusted joint income (MAGI) of up to $160,000 are eligible for the full credit, while those who have a MAGI of up to $180,000 are eligible for partial credit.
In a similar vein, if you want to further your professional development by enrolling in a course the following year, you should think about prepaying your tuition by the 31st of December in order to qualify for the Lifetime Learning Credit when you file your taxes for 2022. The credit can be worth up to 20% of the amount that you have to pay for tuition, fees, and books out of your own money, with a maximum value of $2,000.
It is not restricted to undergraduate costs, and you do not need to be a student enrolled full-time in order to qualify. Similar to the American Opportunity Tax Credit, married couples filing jointly who have a MAGI of up to $160,000 are eligible to claim the entire credit, whereas individuals who have a MAGI of up to $180,000 are eligible to claim a partial credit.