Seven Options to Save You Money on Taxes in 2022
- Taxes are an unavoidable part of life. Every dollar you earn is subject to taxation, calculated based on your total taxable income and where you live.
- There are a few legal ways to reduce your taxable income to keep as much of your hard-earned money as possible.
- Some of the tips below may be late for the 2021 tax season, but they will be helpful for the upcoming 2022 tax season.
Taxes are an unavoidable part of life. Every dollar you earn is subject to taxation, calculated based on your total taxable income and where you live. But unlike tax evasion, there are a few legal ways to reduce your taxable income to keep as much of your hard-earned money as possible. Some of these tips may be a little late for the 2021 tax season, but they will be useful for the upcoming 2022 tax season.
Here are seven ways to reduce your taxable income.
1. Invest in a traditional IRA.
Traditional individual retirement accounts (IRAs) are tax-deferred, so you will not be taxed when you withdraw the money. In addition, contributions to this account may entitle you to a tax deduction every year. However, tax reductions can be limited if a retirement plan by your employer covers you or your spouse or you cross a certain income threshold.
Maxing out your traditional IRA contributions can be a smart move right now; for the 2021 filing, you have until April 15, 2022. After that, you can contribute up to $6,000 to an IRA in 2022, or $7,000 if you are over 50.
2. Take advantage of a 401(k) plan if you have access to it.
Another easy way to reduce your taxable income is to contribute to your company’s 401(k) plan or any other retirement plan available at your workplace. Your contribution to such a plan is made from your pre-tax income, which does not count towards your taxable income for the year. For 2021, you could have contributed $19,500 towards a 401(k) plan and $20,500 for 2022. For both years, you can contribute an additional $6,500 if you are 50 or older.
The advantage of a 401(k) plan over a traditional IRA is that your employer usually matches some or all of your contributions. It ensures that you have a significant financial cushion after retirement, along with the tax savings benefit.
3. Apply for an Employee Stock Purchasing (ESPP) Program.
One of the advantages of working for a publicly-traded company is that you have access to an Employee Stock Purchase Plan (ESPP). An ESPP allows you to purchase company stocks at a discount price. You can generally choose between 1% to 10% of your after-tax income to contribute towards an ESPP, with a maximum contribution limit of $25,000 as of 2022.
When you decide to sell your shares, you can benefit from the tax advantage of an ESPP. If you do not sell immediately, you are rewarded for holding your shares for at least one year. Selling later means you pay less long-term capital gains tax, which means you pay less tax overall.
4. Boost your HSA funding.
A Health Savings Account, or HSA, can be a great tax-exempt option if you have a high-deductible health care plan (HDHP). Benefits of an HSA include:
- The part of your income that is funneled towards an HSA is not subject to federal income taxes.
- Any profit that you make from interest and investments is also tax-free.
- Expenses made from an HSA to pay for qualified medical expenses are tax-free.
- Funds can be held in an HSA indefinitely, which is advantageous because health care costs increase as you age.
For 2021, the contribution limit for personal HDHP coverage was $3,600. For 2022, the personal coverage limit is $6,350. Seniors age 55 or over can put an additional $1,000 in their HSA.
5. Fund your FSA.
When it comes to FSAs, contributions can come from you and your employer. Your contribution to an FSA is made from your pre-tax income. Therefore, the greater your out-of-pocket medical spending in a year, the higher your annual election should be (this is the amount you set aside in your FSA).
The more funds you set aside in your FSA, the more you stand to save on taxes. Distributions from an FSA are usually tax-free if used to pay for qualifying medical expenses. The limit for FSA contributions was $2,750 in 2021 and increased to $2,850 in 2022.
6. Check your eligibility for an Earned Income Tax Credit (EITC).
EITC, or earned income tax credit, is a refundable tax credit for low-to-moderate-income families. If your annual income for 2021 was less than $57,000, then this might be something you should consider. In addition, you may be eligible for almost up to a $7,000 tax credit depending on your marital status, how many kids you have, and your income.
A tax credit decreases your real tax bill dollar for dollar – in contrast to a tax deduction, which reduces the amount of income taxed. The earned tax credit may also result in a refund, and in some cases, it is greater than what you paid in taxes.
7. Look into student loan interest deduction.
A hefty tax bill can be daunting when you are already facing a high-interest debt like a private student loan or a payday loan, for which you may apply for a payday loan debt settlement. As for a student loan, the student loan interest deduction is available to college students and their parents who borrowed to pay for their education. You can get a deduction of up to $2,500 in interest paid from your taxable income.
For 2022, you can claim a deduction of up to $2,500 if your modified adjusted gross income (MAGI) is less than $70,000 or $145,000 if you file jointly.
As you can probably tell, the strategy to save money on taxes relies heavily on investing your excess income. However, doing so also can help you grow your money which will help you keep up with inflation.