It's hard to believe, but we're nearly a month into 2023 already. Most of us aren't done with 2022 quite yet, though. There are still taxes to file, and while many can look forward to a refund, others might get stuck with a bill.
Fortunately, there are still things you can do to reduce this risk. These two moves together can shave up to $15,300 off your taxable income for 2022.
Max out your IRA
IRAs enable you to make prior-year contributions as long as you do so before the tax deadline for the year. For 2022, this is April 18, 2023. You can put money in your IRA right now and classify it as a 2022 contribution so it doesn't count against your 2023 contribution limit.
You're allowed to put up to $6,000 in your IRA for 2022, or $7,000 if you're 50 or older. But its tax treatment depends on the type of IRA you use. You want a traditional IRA if your goal is to reduce your 2022 taxable income. But you'll pay taxes on your withdrawals from this IRA later on. If you want tax-free withdrawals in retirement, you might prefer a Roth IRA, though you'll have to pay taxes on these contributions now.
If you made IRA contributions during 2022, you must make sure that your prior-year contribution doesn't push you over the limits noted above. Excess contributions lead to costly penalties until you take the extra money out.
You also want to verify that your IRA provider correctly applies your contribution to the 2022 tax year instead of the 2023 tax year if you want it to help you this tax season. Reach out to your IRA provider and inquire how to make a prior-year contribution if you don't see the option to choose the appropriate tax year in your online account.
Throw some money in your HSA too
Health savings accounts (HSAs) also enable you to make prior-year contributions. You can contribute up to $3,650 to an HSA for 2022 if you have an individual health insurance plan with a deductible of $1,400 or more. Those with a family plan that has a deductible of $2,800 or more may contribute up to $7,300. And adults 55 and older can add an extra $1,000 to these limits.
You won't be able to contribute to an HSA for 2022 if you didn't have a qualifying health insurance plan. You'll have to rely upon IRA contributions to reduce your tax bill as described above. But if you are eligible to make HSA contributions, you may prefer to put your money here instead.
In addition to the tax break you get on your contributions, HSAs also enable you to make tax-free withdrawals at any age for medical expenses. And if you don't need the money for healthcare, you can make nonmedical withdrawals penalty-free beginning at 65. However, you'll pay taxes on these.
Check with your HSA provider to learn how to make a prior-year contribution to the account and inquire about whether you can invest your HSA funds if you're not already doing so. This will help your savings grow more quickly, which is critical if you plan to use the money for retirement.
Timing is key
You must make the above moves before you file your 2022 taxes if you want to score the tax break. It's technically possible to do this after you file your return as long as it's not past the tax deadline, but then you'll have to pay to file an amended return, showing the IRA and HSA contributions you've made.
It's much easier to make your contributions before submitting your 2022 taxes. And if you'd like to avoid the hassle of prior-year contributions in future years, aim to contribute to your IRA or HSA by Dec. 31.
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