As the end of the year quickly approaches, it may seem too late to take advantage of opportunities to save money on your income taxes for this year. Fortunately, there’s still time to save! Here are a few pointers:
Donations
Consider giving away any items that you no longer need to the charity of your choice. Not only will this act of kindness during the holidays help clean out your closet, but making charitable contributions before the end of the year is also an easy way to save money on your 2022 taxes. For larger deductions, consider donating your old car. Remember that you will need a written receipt for any charitable donation, regardless of the amount.
Accelerate Expenses
An effective tax reducing strategy is to pay as many tax-deductible expenses as possible before December 31st, even if they’re not due until next year. Any payments made before the end of the year will be deductible on this year’s tax return. For example, you should consider paying any mortgage payments, property taxes, outstanding tax-deductible medical bills, state or local income taxes. Note that you can charge some of these expenses, such as medical bills, to your credit card(s) before the year ends. Even if the payment to the card is not made until next year, you still receive the deduction this year.
Defer Income
Another strategy to save on taxes for this year is to defer some income until January, if possible. If you are self-employed or an independent contractor (such as a doctor, dentist, lawyer, etc.), consider holding off on sending the invoices for work done until after the first of the year. This is perfectly legitimate and that way you won’t owe taxes on that income until next year. If you are not self-employed, another option is to request from your employer to pay out any bonuses in January instead of this December. You can also consider holding off on selling investments with taxable gains until next year.
Offsetting Capital Gains and Losses
Understanding both your short and long-term capital gains and losses on your investments can also prove to be an effective tax-saving strategy. While losing money on an investment is never great news, there may be a silver lining. The IRS will allow you to deduct your losses to offset taxes owed on your gains, thus allowing you to recoup a portion of your investment. This is especially true if you have had a large gain through a real estate sale or sold off a highly appreciated asset. Additionally, if your losses exceed your gains, the loss can be used to offset personal income and carry over to offset gains in future years.
Roth IRA Conversion
A year where the market has come down may be a good time to consider a Roth Conversion. This is also more appealing in a year where taxable income is lower than normal.
Although I realize that it can get rather hectic around the holidays, a key tactic to save money and reduce the stress around tax time is to start getting organized now. Don’t wait until April when you’ll be scrambling to get your tax records in order.
