3 steps you can take today to save money on your taxes next year
At this point, the 2022 tax filing season is just a memory for many filers. But if you’re the type of person who tends to think about taxes a lot, then you may already be dreading the 2023 filing season. This especially applies if you tend to owe money to the IRS.
The good news, however, is that you’re not doomed to write a big check next year. If you take these steps as soon as possible, you can prepare to pay less tax to the IRS in 2023 – without breaking the law in any form.
1. Maximize your IRA contributions
An IRA allows you to save money for your retirement in a tax-efficient way. There are now two main types of IRAs you can open: a Traditional IRA and a Roth IRA.
A Roth IRA will not give you immediate tax relief on the money you invest. But a traditional IRA will. And so, if you max out a traditional IRA this year, you’ll protect some of your income from taxes.
Currently, you can contribute up to $6,000 per year to an IRA (whether traditional or Roth) if you’re under age 50. If you are 50 or older, this limit is $7,000.
If you’re 45 and contributing the maximum this year, that means the IRS won’t be able to tax you on $6,000 of income. The result? A lower bill at tax time.
2. Wait at least a year and a day before selling investments in a brokerage account
When you sell investments at a profit in an IRA, you are not taxed on that money immediately. Instead, the gains are tax-deferred with a traditional IRA, and you don’t have to worry about taxes on them until you start taking withdrawals from your account. (With a Roth IRA, investment gains are tax-free.)
But if you sell investments at a profit on a regular basis brokerage accountyou will be pay taxes on those gains as soon as possible. In fact, if you lock in gains in your brokerage account this year, you’ll have to pay when you file your 2022 tax return in 2023.
That’s why it’s important to make sure you hold your investments for at least a year and a day before selling them for a profit. If you choose this route, it will count as long-term capital gains, which are taxed at a much lower rate than short-term capital gains. Short-term capital gains are those that apply to investments you hold for one year or less before the sale.
3. Buy a house
Obviously, you can’t just snap your fingers and become an owner overnight. But if you’ve saved up for a home purchase and are able to fast-track your search, you could benefit tax-wise.
There are various tax breaks available to you as a homeowner, and one of the most important is the ability to deduct the interest you pay on your mortgage (to be clear, however, this does not mean that your entire mortgage payment is tax deductible). You can also deduct the property taxes you have to pay, but depending on how much they are and your local income taxes, you may only be able to deduct part of your property tax bill (and some landlords may not qualify for this deduction at all ).
Nobody likes to pay more taxes than necessary. If you can take these steps quickly, you can set yourself up to be a much happier person when it comes time to file your 2022 return next year.
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