7 min read
8 ways you can save on taxes in 2023
Financial planning—for retirement, health care, and beyond—may offer tax-saving strategies to help trim what you owe.
How to save on taxes? These eight strategies may help you keep more of your hard-earned money.
Use our tax planning worksheet (PDF) to think through potential tax savings from both credits and deductions.
1. File on time.
If you don’t file federal taxes or file for an extension by April 18, 2023, you may face hefty fines. State tax filing deadlines vary, so check with your state’s department of revenue.
Tax deduction: reduces the total income your taxes are based on.
- Example: $50,000 taxable income – $2,000 tax deduction = $48,000 new taxable income
Tax credit: reduces the total income tax you owe.
- Example: $10,000 owed in federal income tax – $2,000 tax credit = $8,000 new total owed
2. Increase retirement account contributions to reduce taxable income.
Traditional IRA and 401(k) or 403(b) contributions are typically made with pre-tax dollars, so adding to either can result in tax savings by reducing taxable income.
4 strategies that help you save for retirement and save on taxes
|Self-employed or a business owner?||SEP or Simple IRA|
|50 or older?||Catch-up contributions (if allowed by your plan) to a 401(k) or 403(b) (an additional $7,500 for 2022) or IRA (an additional $1,000). Learn more about catch-up contributions.|
|Tax-free retirement withdrawals?||A Roth IRA or Roth contributions to a 401(k) (if available): Set up with post-tax dollars now so you can make qualified tax-free withdrawals later. Learn more about Roth IRAs.|
|More retirement savings dollars?||401(k) or 403(b): Boost contribution levels.|
3. Add to 529 college savings.
529s offer potential tax savings in two ways: While contributions are made with after-tax dollars, earnings are tax-deferred while invested—and money you use for qualified educational expenses isn’t taxed. Those 529 contributions may also qualify for state income tax deductions or credits.
4. Contribute to your health savings account (HSA).
If you’re on a high deductible health plan (HDHP) through your employer, you may have access to an HSA to save for out-of-pocket medical expenses. These are tax-advantaged in three ways: Payroll HSA deductions are pre-tax, growth is tax-free, and withdrawals for qualified medical expenses aren’t taxed.
5. Open a flexible spending account (FSA).
If you know you’ll have expenses such as childcare, elder care, medical expenses, or prescriptions, pre-tax FSA savings (through an employer) help you plan your budget and lower taxable income. The IRS-allowed max savings changes every year, and you lose what you don’t use from year to year, so check current IRS contribution guidelines for details. Typically, an FSA is not available if you are using an HSA.
6. Fine tune your paycheck withholdings.
The average tax refund in 2022 was $3,039—an increase of more than 7% and about $250 a month. But on the flip side, withhold too little taxes from your paycheck and you could end up owing money (maybe even be charged a penalty). You can change your payroll tax withholdings at any time; check with your human resources department for information.
Tip: The tax withholding calculator on the IRS site takes just minutes and helps you determine your withholdings.
7. Take all the tax credits and deductions you’re eligible for.
Those may include:
- Home mortgage and a portion of home property taxes. Whether you itemize or take a standard deduction will depend on your situation. A tax professional can help.
- Home energy efficiency improvements, covering everything from windows to solar hot water. Use guidelines on energy tax credits from the IRS.
- An expanded child tax credit (CTC) for any dependent under the age of 18. Learn all the details on CTC eligibility.
- An electric-powered vehicle. Check on tax credit amounts and eligibility for specific cars.
8. Review mutual fund and stock performance.
If you own securities, a tax professional can help determine if you have options to offset capital gains and reduce taxes through tax-loss harvesting.
1 IRS annual limits for tax year 2021 and 2022.
2 Your account must be open for 5 years and you must be over age 59½ to be eligible for qualified tax-free withdrawals.
Investing involves risk, including possible loss of principal. Asset allocation and diversification do not ensure a profit or protect against a loss.
The subject matter in this communication is educational only and provided with the understanding that Principal® is not rendering legal, accounting, or tax advice. You should consult with appropriate counsel or other advisors on all matters pertaining to legal, tax, or accounting obligations and requirements.
Insurance products and plan administrative services are provided by Principal Life Insurance Company. Principal Funds, Inc. is distributed by Principal Funds Distributor, Inc. Securities are offered through Principal Securities, Inc., 800-547-7754, member SIPC. Principal Funds Distributor, Principal Securities and Principal Life are members of the Principal Financial Group®, Des Moines, Iowa, 50392.