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2022 Tax Planning: Year-End Tax Saving Tips
2022 has been a very interesting year for taxpayers. Tax Day will likely look different for many of us, which is why smart tax planning and thinking ahead could really pay off.
You actually have more control over your tax bill than you might think, and proper planning may help reduce what you owe or increase your refund when it comes time to file!
In particular, taxpayers who have had changes in their employment this year are more likely to have changes to their tax situation and may benefit from exploring how their tax return will be impacted.
Understanding tax brackets
Knowing your tax bracket and how your taxes will be calculated can help you better plan for your tax filing situation.
A tax bracket is determined by a taxpayer’s filing status as well as taxable income, meaning the total of all income from all sources, less any adjustments, deductions and certain credits.
According to the IRS, the standard deduction for married filing jointly rises to $25,900 for tax year 2022, up $800 from the prior year. For single taxpayers and married individuals filing separately, the standard deduction rises to $12,950 in for 2022, up $400, and for heads of households, the standard deduction will be $19,400 for tax year 2022, up $400.
For tax year 2022, the top federal tax rate remains at 37% for individual single taxpayers with incomes greater than $539,900 ($647,850 for married couples filing jointly). The other rates are:
35% for income over $215,950 ($431,900 for married couples filing jointly);
32% for income over $170,050 ($340,100 for married couples filing jointly);
24% for income over $89,075 ($178,150 for married couples filing jointly);
22% for income over $41,775 ($83,550 for married couples filing jointly);
12% for income over $10,275 ($20,550 for married couples filing jointly).
The lowest rate is 10% for incomes of single individuals with incomes of 10,275 or less ($20,55 for married couples filing jointly).
State income tax rules and regulations will vary from state to state. While some states have no income tax, others have a flat rate structure. Some states have tax brackets similar to the federal tax bracket structure, with varying marginal tax rates.
Year-round tax planning
Keeping track of important tax records
Gathering and organizing tax-related items throughout the year will make it easier when it comes time to file your taxes. These items should include your paystubs, charitable donations, contributions to retirement accounts – like an IRA and 401(k). It’s recommended that you keep these documents, as well as past tax returns, for seven years.
Life changes can impact your income tax return
Big life changes like getting married, retiring, having or adopting a child, and buying a home can have a big impact on your tax return. Many of these life changes provide taxpayers with important tax credits and deductions. Learn how life changes might impact your income taxes.
Adjusting your W-4 tax withholding
The IRS form W-4 allows employers to compute how much federal income tax to withhold from your paycheck. On this form you indicate your filing status, add other income outside the job you are completing the form for and include the number of dependents for the Child Tax Credits and the Credit for Other Dependents.
If you withhold too much, you’ll likely take home less in your paycheck but possibly owe less or get a larger refund when you file. If you withhold too little, you’ll take home more money in your paycheck, but get a smaller refund or maybe owe taxes when you file next year. Learn more about how to adjust your withholdings.
Understanding the difference between credits and deductions
What may be eligible for credits and deductions changes year to year, so be aware of what’s available for the current tax year. Plus, your situation may have changed due to life changes or COVID-19, and that can impact your taxes too. For example, the Earned Income Credit, or EITC, is a tax credit that can reduce your taxes or increase your tax refund dollar for dollar – which is different from a tax deduction that reduces your taxable income.
But, what does it really mean to “take a deduction?” Taking a deduction on your tax return means you reduce your income that is subject to taxes. When it comes to the main deductions, you can either take the standard deduction, an amount set by law or, if larger, itemize your deductions - a total of specific deductions such as medical expenses, mortgage interest, certain taxes and charitable contributions.
A tax credit is perhaps one of the most valuable items on your tax return, because – unlike a deduction – it actually reduces your taxes owed dollar for dollar, making it more valuable, and sometimes, it’s even refundable meaning if you don’t owe tax, you can get those dollars in the form of a refund.
To recap: Deductions reduce your income before you calculate taxes. Credits are a dollar for dollar reduction in taxes, meaning a dollar of credit is worth a dollar off the taxes and a dollar of deduction reduces your income by a dollar.
Taxpayers have the option to either take the standard deduction or itemize, whichever is larger. This year, the standard deduction is $12,950 for single filers and married filers filing separately, $25,900 for married filers filing jointly and $19,400 for heads of household. Read more about filing jointly vs separately.
Considering other ways to save on your tax bill
Investing in your retirement accounts can help lower your taxable income. Retired taxpayers can typically have investments in many different retirement accounts, ranging from IRA’s, 401(k)s from various jobs, company plans, and just plain old savings.
Furthermore, contributing to a Health Savings Account can also help you lower your taxable income. An HSA is a tax-exempt account used to pay or reimburse qualified medical expenses that generally would be eligible for the medical and dental expenses deduction. Contributions to an HSA grow interest tax free, and the account stays with you even if you change employers or leave the workforce. Unused funds carry over to the next year and there is no time limit on when the funds must be used, unlike a Flexible Spending Account, where funds are forfeited at the end of the year. You must have a high deductible health plan (health insurance) to be eligible to make contributions to an HSA.
Year-end tax planning tips
By the end of the year, plan to review your annual income and estimate your taxes due. Don’t forget to review the credits and deductions available this year and determine any last-minute tax breaks you may be able to get before the end of the year. For example, you may donate to charities and take a deduction. While the direct deduction of $300 per taxpayer ($600 if filing jointly) is no longer available, you can still itemize deductions and claim your charitable contributions.
Also, start to plan and organize for filing your taxes by the end of the year with a checklist. Many of these documents will be necessary to complete your return when it comes time to file. For example, you should plan on gathering personal documentation like proof of your Social Security number or tax ID number, as well as your income statements. Check out Jackson Hewitt’s personalized and free document checklist.
About the Author
Mark Steber is Senior Vice President and Chief Tax Information Officer for Jackson Hewitt. With over 30 years of experience, he oversees tax service delivery, quality assurance and tax law adherence. Mark is Jackson Hewitt’s national spokesperson and liaison to the Internal Revenue Service and other government authorities. He is a Certified Public Accountant (CPA), holds registrations in Alabama and Georgia, and is an expert on consumer income taxes including electronic tax and tax data protection.
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