Part of our build your own financial plan series
Want to keep more money this tax season? These 10 strategies can help.
Want to keep more of your hard-earned money? Making a plan for tax season can help.
So can filing on time. The federal filing deadline is April 18, 2022, or file for an extension to avoid hefty fees. State tax deadlines may vary, so check with your state’s department of revenue.
Next, keep tabs on changes to your situation, and to tax rules and laws. Ask a tax professional for guidance.
Then, use our tax planning worksheet (PDF) to think through potential savings from tax credits and deductions.
Finally, consider these 10 tax-saving strategies for the upcoming tax season.
Tax-prep tip: Why lower your taxable income? Less income to tax = lower taxes. And that can mean more money in your pocket.
1. Increase retirement account contributions.
Any 401(k) or 403(b) contributions taken from your paycheck on a pre-tax basis reduce your taxable income (that’s the amount of your income the government can tax). Your contributions to a traditional IRA may also be on a pre-tax basis (for those eligible to deduct their contribution) and therefore lower your annual gross income (AGI), too.
Whether you can take a tax deduction depends on how much you make and if you have access to a retirement plan through your employer. In 2022, the maximum IRA contribution is $6,000 and the max 401(k) contribution is $20,500. Learn more about contribution limits.
But there are other strategies to turn up your savings for your after-work years:
Quick guide to stepping up retirement savings
|Are you self-employed or a business owner?||Consider saving in a SEP or Simple IRA.|
|Are you 50 or older?||Consider making a catch-up contribution. That’s an additional $6,500 to a 401(k) or 403(b) plan, or $1,000 to an IRA beyond the standard limits.1 Learn more about catch-up contributions.|
|Do you want to avoid taxes when you make a withdrawal?||Consider a Roth IRA. You pay taxes now but enjoy qualified tax-free withdrawals later.2 Learn more about Roth IRAs.|
|Looking to boost your taxable income for the year?||Consider an IRA to Roth conversion. You pay taxes now so you don't pay them in the future when you take withdrawals after five years.|
|Are you ready or able to speed up your retirement savings?||Think about bumping up contributions to your 401(k) or 403(b) plan.|
2. If you have children, boost your savings in a 529 college savings account.
A 529 plan is a tax-advantaged way to save for education-related expenses. You contribute with after-tax dollars, but earnings are tax-deferred while invested.
Many states offer state income tax deductions or credits for contributions to a 529 college savings plan. Tax benefits differ by state and how much you contribute to a 529 plan during a tax year. Learn more about the tax advantages of a 529 plan.
3. Contribute to your health savings accounts (HSAs).
This is another one that may be tied to your employee benefits at work. If you’re on a high deductible health plan (HDHP) through your employer, if available you can contribute to an HSA to save for out-of-pocket medical expenses. Learn more about HSAs tax rules from the IRS.
4 HSA advantages
|Tax?||Money added isn’t taxed.|
|Growth?||Accounts grow tax-free.|
|Withdrawals?||Withdrawals for qualified medical expenses aren’t taxed.|
|Retirement?||The account can be used in retirement.|
4. Improve your home’s energy efficiency.
The residential energy efficient property credit allows homeowners to claim 26% of the cost of alternative energy equipment (including installation). That eligible equipment includes solar hot water heaters, solar electric equipment, small wind turbines, and fuel cell property.
If you do any home efficiency installs, hang on to your receipts. Learn more about energy tax credits from the IRS.
5. Open a flexible spending account (FSA).
This is a great way to “pre-save” for expenses you know you’ll have, such as childcare, elder care, medical expenses, or prescriptions. If an FSA is available through your employer, every dollar you put in lowers your taxable income. The money comes out of your paycheck on a pre-tax basis. Then you submit qualifying expenses for reimbursement as they occur.
FAQs about FSAs
|What’s the max you can set aside?||$2,850 for 2022, plus $5,000 for dependent care.|
|Carryover into another year?||No; use it or you lose it.|
|What can you use it for?||Some items may not be reimbursable; check first.|
|How does it affect your taxes?||Whatever you set aside may reduce your taxable income.|
6. Review your paycheck withholdings.
Check to see if you have too much, too little, or just the right amount taken from your paycheck for federal and state taxes.
Too little? You could end up owing money (maybe even be charged a penalty). Luckily you can change your withholdings at any time.
Tax-prep tip: Use the tax withholding calculator on the IRS site to find where you stand, withholding-wise. It only takes a few minutes.
7. Take every tax credit available to you.
The goal is to take all the credits you’re entitled to so that you reduce your tax bill. That includes options like the recently expanded child tax credit, offering up to $3,600 per child under age 6 and $3,000 per child under 18. Get all the details on CTC eligibility and calculate the amount available to you.
Tax deduction: reduces the amount of 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 amount of income tax you owe.
- Example: $10,000 owed in federal income tax – $2,000 tax credit = $8,000 new total owed
8. Buy your own home.
If you become a homeowner and itemize mortgage interest and a portion of your property taxes, you may reduce your taxable income. Or, you can also take the standard deduction. Each person’s situation is different. A tax professional can help you review the effect on your tax plan.
Tax-prep tip: Several years ago, the standard deduction for each filing status increased significantly after recent tax reform. But if your total itemized deductions are more than the standard deduction, you can still claim deductible expenses on your tax return. Calculate it both ways and do what works in your favor.
9. Buy an electric-powered vehicle.
The amount of this tax credit depends on the size of the vehicle and its battery capacity, up to a max of $7,500. (Some states may offer credits, too.) However, manufacturers are starting to max out this credit—for instance Teslas are no longer eligible. Learn more about tax credit amounts and eligibility for specific cars.
10. Keep an eye on your investment portfolio.
If you have mutual funds and stocks, watch their performance during the year. Selling some securities at a loss by year-end to offset capital gains may help reduce your taxes. It’s called “tax-loss harvesting.” Consult your financial professional for guidance on this tactic, or we’ll help you find one.
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.