I don't think it's farfetched to say nobody likes taxes. We like the benefits we get from taxes, but nobody likes seeing their hard-earned money taken away every paycheck. Unfortunately, taxes are a necessary evil, and they're not going anywhere. As you near retirement, it becomes even more important to hold on to your money and increase your savings. One way to do so is by lowering how much you pay in taxes.
Here are four easy steps you can take to lower your tax bill as you're nearing retirement.
1. Boost your catch-up contributions
One of the best parts of a 401(k) plan is that it allows you to contribute pre-tax money, lowering your taxable income and tax bill. To prevent people from putting away too much money and not paying enough taxes on income, Uncle Sam puts a limit on how much you can contribute annually to your 401(k). For 2022, the contribution limit is $20,500, unless you're 50 or older, in which case you can add an additional $6,500 in annual catch-up contributions.
If you're 50 or older and retirement isn't too far off, it may be time to take advantage of the $27,000 you're allowed to contribute to your 401(k). It results in the win-win of letting you save for retirement and save on taxes right now.
2. Increase your standard deduction
A standard deduction is a set amount taxpayers can use to reduce their taxable income, but you can only use it if you don't itemize your deductions (such as writing off mortgage interest). For example, if you're single, you make $80,000, and you take the standard deduction in 2022, only $67,050 will be taxed. The standard deduction amount depends on your filing status, whether or not someone can claim you as a dependent, and your age. Here are the 2022 standard deductions:
Married filing jointly
Head of household
If you're 65 or older at the end of the tax year, you're allowed an additional deduction, which could mean lowering your tax bill even more (or increasing your returns). For 2022, the increase is $1,750 if you file as single or head of household, or $1,400 if you're married and filing jointly. If both you and your spouse are 65 or older, the standard deduction increases by $2,800.
3. Contribute to a traditional IRA
Although you technically contribute after-tax money into a traditional IRA, your contributions may be tax deductible, depending on your filing status, income, and whether or not you're covered by a retirement plan at work. Traditional IRAs get the same tax break as a 401(k), but they operate similarly to brokerage accounts because you can invest in any stock you want.
The maximum amount you can contribute to an IRA in 2022 is $7,000 if you're 50 or older. If you're looking to lower your tax bill, consider taking advantage of a traditional IRA.
4. Use a health savings account
Unfortunately, health-related expenses often increase as people age. Aside from your house or car, health expenses will likely be one of your top expenses in retirement. One way to begin prepping for those expenses is by using a health savings account (HSA). An HSA lets you put away pre-tax money that you can use for qualified medical expenses, including deductibles, coinsurance, copayments, and more.
For most people, health expenses will be inevitable. So if you're going to be paying them anyway, you might as well put the money aside and get a tax break for it. If you have a high deductible health plan, you can contribute up to $3,650 if you have self-only coverage and $7,300 if you have family coverage.
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