How to Reduce Taxes at the Last Minute

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As the end of the year gets closer and your options to lower your taxes are on your mind, you likely are wondering how to reduce taxes in the time remaining. There are only a few days left to make those deductions, but you do still have some options.

Make a Contribution to a Retirement Account

An easy way to reduce taxable income—even at the last minute—is to put more money into your retirement account. Depending on the type of account you have, the contribution may be deductible.

Avoid going over the contribution limits so that you do not have to pay a penalty. If you have already met your limits, you may be able to open a new retirement account. If you have a 401(k), you can contribute up to $20,500 in 2022, and if you are 50 or older, you can contribute $27,000. IRA accounts allow you to contribute up to $6,000 in 2022, but if you are 50 or older, you can contribute up to $7,000.

Open a Health Savings Account

A health savings account (HSA) offers a way to reduce your taxes by letting you deduct the amount deposited. When opening an HSA, you must have a separate, high-deductible health insurance (HDHP) policy. The Internal Revenue Service determines the deductible amount for medical purposes. For 2022, they are as follows: $1,400 for an individual and $2,800 for a family.

Like other retirement accounts, there are limitations on how much you can deposit per year. Contribution limits are $3,650 per year for an individual and $7,300 for a family.

Investopedia mentions that there are some eligibility requirements to open an HSA. You cannot, for example, have any other health insurance—including Medicare—you must have a qualified HDHP, and you cannot be claimed as a dependent.

An HSA also serves as a way to save for retirement because it builds interest tax-free. Any money used for qualified health purposes is tax-free. A penalty of 20 percent occurs on money that is not used for health reasons until you turn 65. At that time, you can get withdrawals for any purpose without a penalty. Taxes must be paid when you make a withdrawal.

A HSA is best used by someone who is young and in good health and has family members that are also in good health. Ideally, you will want to have enough income to cover most of your medical expenses without making withdrawals from your HSA.

Unlike a flexible spending arrangement (FSA), an HSA does not require the money to be spent by year’s end, or you lose it. Your money accumulates and rolls over into the next year—making it a good source for retirement savings.

Make a Contribution to Charity

You can also reduce income tax by making charitable donations. Organizations devoted to helping people always appreciate donations. You must get a receipt for any donation made to receive a tax deduction.

You can make charitable deductions from your payroll, cash, checks, or goods. Most likely, it will be necessary to itemize to claim the deduction.

You can also make a gift of stock to a charitable organization. It could be a good way to reduce your capital gains tax because the amount donated is deductible.

Sell Losing Stock

You can reduce your capital gains tax by selling your stock that did not perform well in 2022 and selling it for a loss. Then, use that loss to offset your wins. You can reduce capital gains by your losses—dollar for dollar, says TurboTax.

Losses up to $3,000 can be subtracted from your gains each year. If you have losses greater than $3,000, you can deduct the difference from the following year’s taxes. If necessary, you can do this each year indefinitely.

Defer Income Until Next Year

If you expect some pay before the end of the year—such as a bonus—that might put you into the next tax bracket, ask them to hold it until next year, TurboTax suggests. It will enable you to pay fewer taxes this year, but it will not work if you expect to make more money next year than you did this year.

Qualify for the Saver’s Credit

The Saver’s Credit enables people with retirement accounts to deduct a credit of up to $1,000 from their taxes. As a credit, it does much more than just give you a lower  adjusted gross income (AGI), it also lowers how much you owe in taxes. Not everyone can qualify, but if you have a qualified retirement account (401(k), 403b, IRA, etc., and have lower amounts of income, you can receive a nonrefundable credit.

In 2022, if you are married and filing jointly, NerdWallet says your AGI needs to be $41,000 or less to qualify for the Saver’s Credit. You can receive up to 50 percent of your contribution—up to $2,000. The credit is pro-rated if you make more than this—up to $68,000 for couples.

Single people cannot have an AGI above $20,501 to receive 50 percent of their contribution up to $2,000. The maximum income they can have is $34,000 to get a pro-rated amount.

Other qualifications apply to get this credit. HRBlock says that you must be 18 by the end of 2022; cannot have been a full-time student for five months in 2022; made voluntary contributions to a qualified retirement plan; and cannot be claimed by someone else as a dependent.

Interest on Student Loans

If you have paid interest on your student loan this year, you can use it to lower your taxes. NerdWallet says you can deduct as much as $2,500 of that interest—but you will need to itemize to get a deduction.

If you are single and made more than $70,000 or more than $140,000 if filing married jointly, you cannot claim the deduction. Married people filing separately cannot claim it, and neither can dependents on someone else’s tax return.

Now that it is really close to the end of the year, you need to move fast to apply these income tax reduction strategies. They will work. Using more than one of them will reduce your taxes even more.

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