Finance
Tax planning is the assessment and preparation of a person’s financial position to boost tax breaks and reduce tax liabilities legally and efficiently. Taking a visionary tax-planning procedure can help you save money now and in the future. Taxes are difficult to avoid, but here are some strategies to reduce taxes and optimize returns.
Use a Health Savings Account
Employees who have a high-deductible health insurance plan can utilize a health savings account (HSA) to lower their tax liability. HSA contributions made through payroll deduction are not included in the employee’s taxable income; however, direct contributions to an HSA are tax-deductible in full. The maximum deductible contribution amount for 2022 is $3,650 for an individual and $7,300 for a family. These accounts can then grow without having to pay taxes on their earnings.
Maximize the Retirement Account’s Tax Advantages
Making the biggest contributions to your retirement account every year is one of the most prevalent ways to reduce your taxes every year. For high-income company owners, as your income increases, so will the number of tax deductions you’ll need to keep your tax bill in check. Fortunately, you can set up a 401(k) profit-sharing plan and contribute $61,000 per year. Pre-tax double contributions to this plan type will significantly reduce your tax liability. After you’ve contributed the highest amount to your 401(k), you may want to consider about a Defined-Benefit Pension Plan. These kinds of plans have increased in popularity in recent years. You might save a few hundred thousand dollars per year before taxes.
Make Charitable Contributions
The CARES Act increased the postponement of the 60% AGI limit, permitting a person to deduct cash charitable contributions of up to 100 percent of their AGI. However, if tax rates rise, deductions become much more beneficial in a subsequent year at a higher rate. Discuss with your tax advisor which scenario makes the most sense for your situation and any other restrictions that may apply to charitable contributions you make.
Earn Tax Credits
Tax credits are specifically helpful since they decrease your tax bill dollar for dollar. Families with qualifying children under the age of 17 can deduct up to $2,000 from their federal income taxes. The parents using childcare services can also be qualified for the federal Child and Dependent Care Tax Credit, which is worth up to $3,000 for one child and $6,000 for two or more children. The earned income tax credit for low or modest taxpayers can be as much as $6,557 for a family with children or up to $529 for taxpayers who do not have a child who qualifies, and they should meet certain income limits and other requirements.
Fund your Flexible Spending Account
If your employer provides a flexible spending account, you should use it to reduce your tax bill. Each year the IRS allows you to deposit tax-free funds directly into your FSA; the limit is $2,850 in 2022. You must use the funds for medical, dental, and other expenses during the calendar year. Some employers may allow you to carry forward the amount up to $570 to the following year.
