Clark Jeffries
Apr 3, 2023
These tips could save you big time
There’s not much time left to file your tax return by the April 18 deadline.
For many, it’s the time of year for a windfall. As of March 17, the IRS had sent out $158 billion in tax refunds, with an average payout of $2,933.
If you think your tax bill is chiseled in stone at the end of the year, think again. Though it’s true that most money-saving options to defer income or accelerate deductions become much more limited after December 31, there is still a lot you can do to make the tax-filing season cheaper and easier.
Contribute to retirement accounts
If you haven’t already funded your retirement account for 2022, you have until the tax return filing due date to do so. That’s the deadline for contributions to a traditional IRA, deductible or not, and to a Roth IRA.
If you have a Keogh or SEP and you get a filing extension to October 16, 2023, you can wait until then to put 2022 contributions into those accounts.
Making a deductible contribution will help you lower your tax bill this year. Plus, your contributions will compound tax deferred. It’s hard to find a better deal.
If you put away $5,000 a year for 20 years in an investment with an average annual 8% return, your $100,000 in contributions will grow to $247,000.
The same investment in a taxable account would grow to only about $194,000 if you’re in the 25% federal tax bracket (and even less if you live in a state with a state income tax to bite into your return).
To qualify for the full annual IRA deduction in 2022, you must:
Not be eligible to participate in a company retirement plan, or
If you are eligible, you must have adjusted gross income of $68,000 or less for singles, or $109,000 or less for married couples filing jointly.
If you are not eligible for a company plan but your spouse is, your traditional IRA contribution is fully deductible if your combined gross income does not exceed $204,000.
For 2022, the maximum IRA contribution you can make is $6,000 ($7,000 if you are age 50 or older by the end of the year). For self-employed persons, the maximum annual addition to SEPs and Keoghs for 2022 is $61,000. Moving forward, the new limit is $6,500 ($7,500 if you are age 50 or older by the end of the year).
Although choosing to contribute to a Roth IRA instead of a traditional IRA will not cut your 2022 tax bill—Roth contributions are not deductible—it could be the better choice because all withdrawals from a Roth can be tax-free in retirement.
Withdrawals from a traditional IRA are fully taxable in retirement. To contribute the full $6,000 ($7,000 if you are age 50 or older by the end of 2022) to a Roth IRA, you must earn $129,000 or less a year if you are single or $204,000 if you’re married and file a joint return.
2023 limits are $6,500/year ($7,500 if you are age 50 or older by end of 2023) as long as your income is less than $153,000 if you are single or $228,000 if you’re married and file a joint return).
The amount you save for contributing will vary. If you are in the 25% tax bracket and make a deductible IRA contribution of $6,000, you will save $1,500 in taxes the first year. Over time, future contributions will save you thousands, depending on your contribution, income tax bracket, and the number of years you keep the money invested.
Hit hard by severe storms? You may qualify for a reprieve.
The IRS announced that victims of severe storms, straight-line winds and tornadoes that hit certain communities in Mississippi have until July 31 to file individual and/or business tax returns and make tax payments. It also means they have until that date to make 2022 contributions to their IRAs and health savings accounts, as well as submit any quarterly estimated tax payments, quarterly payroll, and excise tax returns.
The IRS has the authority to push back the filing deadline for taxpayers in federally declared disaster areas. Last week, the agency said victims of severe snowstorms that hit parts of New York in late December have until May 15 to file.
Because of various natural disasters, most of California and parts of Alabama and Georgia have until Oct. 16 to file. For a list of other areas given extensions because of extreme weather events, go to irs.gov and search for “Tax Relief in Disaster Situations.”
If you live or have a business outside the covered disaster area but have been affected by the storms, the IRS says you can call its disaster hotline at 866-562-5227 to request an extension.
Can’t pay your tax bill? Here’s what to do.
Your instinct may be to hide from the IRS if you don’t have the money to pay your tax bill. But resist that urge.
Your first contact should be the agency — not the number you hear on a television or radio ad promising tax relief.
Go to irs.gov and click the link that says “Make a Payment.” There, you’ll find information about payment options. You may qualify for an installment agreement to pay off your outstanding balance over time.
You can also apply for what’s called an “Offer in Compromise,” or OIC. This program is intended to help people who are so financially strapped that it is unlikely the agency could collect all that is owed.
An OIC allows you to settle your tax debt for less than the full amount owed. Again, go to irs.gov and search for “OIC,” and then use the pre-qualifier tool to check your eligibility.
Still scared to file because you owe? Do it anyway.
File your return even if you can’t pay to avoid the penalty for failing to file. It will save you money.
There is a failure-to-file penalty, which is 5 percent of the unpaid taxes for each month or part of a month that your tax return is late. Ordinarily, the penalty won’t exceed 25 percent of your unpaid taxes.
And in case you didn’t know, the IRS charges interest on penalties.
Need more time? Seek a filing extension but be prepared to pay.
Getting an extension to file is easy. You just need to submit IRS Form 4868 either electronically or by paper.
But an extension does not mean you get more time to pay. You still have to estimate your tax liability and pay that amount by April 18.
By the way, the IRS will automatically process an extension when you pay part or all of your estimated income tax electronically.
Turned 72 last year? Don’t miss this April 1 tax deadline.
You can’t hold on to your tax-deferred retirement savings forever.
If you have a retirement account, such as a 401(k), a traditional IRA, a SEP IRA or a SIMPLE IRA, there is an annual required minimum distribution, or RMD, that must start at a certain age. The Secure 2.0 Act bumped the age requirement from 72 to 73 starting in 2023. It’ll be 75 in 2033.
You have until April 1 of the following year after reaching the required minimum distribution age to make your first RMD payment.
So if you turned 72 last year and still haven’t taken your first RMD, you only have until April 1 to do so. And this is important to note: Even if you decide to delay your initial RMD until the April 1 deadline, you will still have to take a second RMD by Dec. 31
.
If you don’t take the minimum distribution, there is a steep penalty on the amount not withdrawn as required. Starting this year, if an account owner fails to withdraw the full amount of the RMD by the due date, the amount not taken is subject to a 25 percent excise tax, down from the previous 50 percent. In some cases, the penalty could be 10 percent.
“The penalty may be waived if the account owner establishes that the shortfall in distributions was due to reasonable error and that reasonable steps are being taken to remedy the shortfall,” according to the IRS. File Form 5329, follow the special waiver instructions for completing lines 52 through 55, and attach a letter explaining why you believe you qualify for relief.
Organize your records for tax time
Good organization may not cut your taxes. But there are other rewards, and some of them are financial. For many, the biggest hassle at tax time is getting all of the documentation together. This includes last year’s tax return, this year’s W-2s and 1099s, receipts and so on.
How do you get started?
Print out a tax checklist to help you gather all the tax documents you’ll need to complete your tax return.
Keep all the information that comes in the mail in January, such as W-2s, 1099s and mortgage interest statements. Be careful not to throw out any tax-related documents, even if they don’t look very important.
Collect receipts and information that you have piled up during the year.
Group similar documents together, putting them in different file folders if there are enough papers.
Make sure you know the price you paid for any stocks or funds you have sold. If you don’t, call your broker before you start to prepare your tax return.
Know the details on income from rental properties. Don’t assume that your tax-free municipal bonds are completely free of taxes. Having this type of information at your fingertips will save you another trip through your files.
Find the right tax forms
You won’t find all of them at the post office and library. Instead, you can go right to the source online.
View and download a large catalog of forms and publications at the Internal Revenue Service website or have them sent to you by mail.
You can search for documents as far back as 1980 by number or by date.
The IRS also will direct you to sites where you can pick up state forms and publications.
Itemize your tax deductions
It’s easier to take the standard deduction, but you may save a bundle if you itemize, especially if you are self-employed, own a home or live in a high-tax area.
Itemizing is worth it when your qualified expenses add up to more than the 2022 standard deduction of $12,950 for most singles and $25,900 for most married couples filing jointly.
Many deductions are well known, such as those for mortgage interest and charitable donations.
You can also deduct the portion of medical expenses that exceed 7.5% of your adjusted gross income for 2022.
Don't shy away from a home office tax deduction
The eligibility rules for claiming a home office deduction have been loosened to allow more self-employed filers to claim this break. People who have no fixed location for their businesses can claim a home office deduction if they use the space for administrative or management activities, even if they don’t meet clients there.
As always, you must use the space exclusively for business.
Many taxpayers have avoided the home office tax deduction because it has been regarded as a red flag for an audit. If you legitimately qualify for the deduction, however, there should be no problem.
You are entitled to write off expenses that are associated with the portion of your home where you exclusively conduct business (such as rent, utilities, insurance and housekeeping). The percentage of these costs that is deductible is based on the square footage of the office to the total area of the house.
A middle-class taxpayer who uses a home office and pays $1,000 a month for a two-bedroom apartment and uses one bedroom exclusively as a home office can easily save $1,000 in taxes a year. People in higher tax brackets with greater expenses can save even more.
One home office trap that used to scare away some taxpayers has been eliminated.
In the past, if you used 10% of your home for a home office, for example, 10% of the profit when you sold did not qualify as tax-free under the rules that let homeowners treat up to $250,000 of profit as tax-free income ($500,000 for married couples filing joint returns).
Since 10% of the house was an office instead of a home, the IRS said, 10% of the profit wasn’t tax-free. But the government has had a change of heart. No longer does a home office put the kibosh on tax-free profit.
You do have to pay tax on any profit that results from depreciation claimed for the office after May 6, 1997. It’s taxed at a maximum rate of 25%. (Depreciation produces taxable profit because it reduces your tax basis in the home; the lower your basis, the higher your profit.)
Consider a tax professional
As always, if your situation is more complex (business owner for example) consider working with a professional who specializes in working with clients like you.