Once you file your tax return each year, it’s a good idea to start planning for next year’s return. Here are a few things you can look at doing today to help set yourself up for success in tax year 2022.
Did you owe more than $1,000 or receive a $1000+ refund on your 2021’s tax return?
Consider discussing your tax withholding with your tax professional and your HR/payroll contact. Receiving a refund from the U.S. government is basically providing the feds with an interest-free loan. If you owed more than $1,000, you may not be withholding enough for taxes, so working with a tax professional will be key to get your withholding dialed in.
If a self-employed person, are you setting aside enough funds on a monthly basis to cover the minimum quarterly estimated tax payments?
This should be a part of your budget. While withholding may not seem to apply to your situation because you are self-employed, it doesn’t mean you’re exempt for sending money to the IRS on a regular basis. Self-employed individuals are generally required to make quarterly estimated tax payments. Since this process is not automated like withholding on an employee’s W-2 wages, proper planning will be key to helping ensure no penalties or interest are charged.
Did you know the benefits of Traditional IRA and Roth IRA contributions are generally limited to those earning under a certain amount each year?
If you are currently contributing to a Roth IRA, or plan on it, and your anticipated adjusted gross income (AGI) for 2022 is over $144,000 (single)/$214,000 (joint), then those contributions will not be allowed. You’ll want to work with your advisor and tax professional to correct any 2022 contributions made thus far.
If 2022 earnings are expected to be between $129,000 - $144,000 (single) or $204,000 - $214,000 (joint), you may want to hold off until later in the year or early 2023 to determine if you will be eligible to make at least a partial Roth IRA contribution. These are called “phase-out” ranges, where the eligible contribution amount is phased out as AGI approaches the higher numbers.
Making a deductible contribution to a Traditional IRA is a bit more nuanced, with multiple phase-out ranges. If you or your spouse participates in an employer-sponsored plan, there are adjusted gross income limits that could reduce the deductibility of contributions. You’ll want to connect with your advisor and tax professional to gain more insight into your specific situation.
Did you itemize your deductions?
Due to recent increases in the standard deduction, approximately 90% of taxpayers now use the standard deduction. What does this mean for you? If you are giving regularly to charities, but not enough to exceed the standard deduction (currently $25,900 for joint and $12,950 for singles), it may make sense for you to look at doubling up those contributions in one year to receive more tax benefits from your generosity. This is obviously not the primary motivation for most giving, but it’s certainly a bonus.
Let’s take Bill and Susan for example. They regularly give $20,000 each year to their church and other charities. Given the standard deduction of $25,900 in 2022, it is unlikely they will ever receive additional tax benefits from their gifts. If they decide to double up their gifts in 2022 to $40,000, they will receive $16,100 more in deductions in 2022. If they then do not give in 2023, their tax situation will not be impacted.
Ultimately, there are many small adjustments that can be done throughout the year to limit your payments to Uncle Sam. We do our best to keep you updated, though it’s always best to speak to your tax professional for more insight and to better understand your situation. Don’t have a CPA or accountant? We are happy to provide referrals!