It’s easy to avoid thinking about your income taxes until just before the April deadline. In fact, according to the Internal Revenue Service,
An effective way to not delay the inevitable and help reduce the stress of filing taxes is to do what you can throughout the year to minimize what you’ll owe. Including
Consider these three ways to help stay tax efficient before you file in the spring.
1. Save more for retirement by maximizing contributions.
Investing for your future retirement goals can help benefit you at tax time every year. Contributions to the following qualified retirement accounts grow tax-deferred until you’re ready to make withdrawals.1,2
You typically are able to take a tax deduction for contributions to a traditional individual retirement account (IRA). However, if you or your spouse participate in an employer-sponsored retirement plan you must meet the
While there is no tax deduction for Roth IRA contributions, if you meet the
The maximum IRA contribution for the 2021 and 2022 tax years is $6,000 ($7,000 if you’re 50 or older). You have until the federal tax filing deadline of April 15 to make contributions to traditional and Roth IRAs for the previous year.3
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401(k) and other employer-sponsored retirement plans
Your contributions to a 401(k), 403(b) or a similar salary deferral employer-sponsored retirement plan are funded with pre-tax dollars, effectively reducing your taxable income for the year by that amount.
The maximum 401(k) contribution is $19,500 in 2021 and $20,500 in 2022. The annual catch-up provision for anyone age 50 and older is $6,500, which means you can contribute up to $27,000 in 2022.
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2. If you’re raising kids, look for child tax credits and college savings plans.
Raising a family is both priceless and expensive. Here are two options that can help you financially.
Child tax credit
Parents of children under age 18 received advance payments of the
The tax credit provides up to $3,000 per qualifying dependent child under age 18 and increases to $3,600 for children under age 6. Other dependents, including children who are 18 and full-time college students ages 19-24, can receive a nonrefundable credit up to $500.
It’s a tax credit, which means it reduces your taxes due on a dollar-for-dollar basis. However, there are income thresholds above which the credit begins to phase out. The full credit is for single filers with adjusted gross income under $75,000 ($150,000 for married filing jointly and $112,500 for head of household).
529 Educational Savings Plan
If you’re planning to help your children with education expenses, a 529 education savings plan may be a tax-efficient option.4
While you cannot deduct contributions to 529 plans on your federal income taxes, most states with an income tax allow residents to deduct a portion of their contributions or receive a tax credit.
3. Consider the advantages of healthcare savings accounts.
If you have access to a flexible spending account (FSA) or
Both can reduce your taxable income for the year and be used to pay for qualifying medical, dental and other eligible healthcare costs. But be aware of their differences.
Flexible spending account
If your employer offers FSAs, your contributions are typically made through payroll deduction on a pre-tax basis, which reduces your taxable income. However, the account does not belong to you. If you leave your job or don’t use the funds during the year, you lose the money—unless your employer allows some carryover.
In 2022, you can contribute up to $2,850 to a healthcare FSA.
Health savings account
To qualify for an HSA, you need to have a high deductible health insurance plan. You can make contributions until April 15 for the previous tax year, and any funds you contribute up to the annual limit are yours if you leave your employer and carry over from year to year. Any earnings grow tax-free.
In 2022, individuals can contribute up to $3,650 and families can contribute up to $7,300—an increase from $3,600 and $7,200 in 2021. If you’re 55 by the end of the year, you can contribute an additional $1,000.
Be mindful of the contribution limits and withdrawals for eligible expenses for FSAs and HSAs, or you could face tax penalties or forfeit unused funds.5
Consider options to protect your livelihood
Finally, have you thought about
While you can’t predict the future, you can plan for it. The death benefit from life insurance is generally income tax-free and could help your family during a difficult transition.
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