No one likes thinking about income taxes, so most of us tend to put it off until tax filing time each spring. But because adequate advance planning can help you better strategize your tax return, you should think about it before the end of the year. If you get started now, you can cross this task off your to-do list before the busy holiday season.
Take a look at your paycheck withholding. If you’re paying too little in taxes throughout the year, you can end up owing Uncle Sam at tax time. Use this IRS tax withholding calculator to estimate the taxes you should be paying. If it looks like you’re underpaying, file a new W4 form with your employer.
Max out contributions to your 401k, IRA, etc. As you probably know, retirement accounts do more than help you save for the future. They also serve to reduce your taxable income by the amount that you contribute each year, potentially saving you a lot on your income taxes. You might as well reap the maximum tax benefit.
For 2022, max contribution limits are:
- For 401k: $19,500 up to age 49
- For 401k: $26,000 for age 50+ (with $6,500 catch-up contribution)
- For IRA: $6,000 up to age 49
- For IRA: $7,000 for age 50+ (with $1,000 catch-up contribution)
Max out your health savings account. You should also consider maxing out contributions to your health savings account for the same reasons as your retirement account. Any unused funds in the account will roll over to the next year, and even into retirement, allowing you to save for healthcare expenses in the future. The current annual contribution limit is $3,650 for individuals, $7,300 for families, and an additional $1,000 for individuals aged 55 and up.
Take your RMD if you’re required to do so. Once you reach age 72, you must begin taking required minimum distributions or else face a penalty at tax time. This withdrawal must be taken by December 31.
Spend leftover funds in your flexible spending account. You’ll pay taxes on any funds left in the account after December 31, and you might even lose the money if your employer does not allow rollovers. So, you might as well spend down the account before the end of the year.
Talk to your tax professional. Certain other actions, such as charitable contributions and investment losses, must occur before December 31 in order to be useful on your tax return. Talk to your tax professional or financial advisor now, so that you have time to take the appropriate actions.