For many people, the start of May comes with the certainty that you won’t have to think about your taxes for another 11 months. But if last month’s tax deadline came with high stress levels or, worse, a big surprise bill, it might be time to think about making a few changes to avoid running into the same issues next month. next year.
There’s no guarantee next April’s rules will be the same as this year’s, notes Mark Jaeger, vice president of tax operations for TaxAct. Even if Congress doesn’t enact sweeping reforms, tax rules almost always change from year to year, he says. “It’s never apples to apples.”
Still, you can learn from April’s mistakes to ensure you’re not in the same boat next spring.
“I always tell clients that if you’re an employee of a company and you find you’re out of money, it’s tax time and you owe money, one of the things you could do is file a new W-4 form,” Jaeger says. It’s the document you submit to tell your employer how much of your paycheck to set aside for taxes on each paycheck. pay.
“It’s kind of the easiest and simplest thing to do to avoid having to pay more taxes next tax season,” he adds.
Adjust withholding on your Form W-4
If you haven’t changed jobs in a few years, you might not have noticed in 2020 when the IRS revised Form W-4. For some people, the revisions to the form changed the math behind what they had retained, notes Michael Garry, founder and CEO of Yardley Wealth Management.
“One thing that people have run into over the past year is that they haven’t had enough detentions,” he says. “This is my second year using the new W-4, and people who were usually about to pay the right amount ended up owing more than they ever did. They had a big surprise, and not in a good way.”
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If you ended up underpaying throughout the year and ended up with a big bill for the 2021 tax year, adjusting your withholding now can help ensure you don’t owe a big bill for 2022.
To do this, you will need to file a new W-4 with your company’s human resources department. To determine the additional amount to withhold, plug your information into the IRS’ withholding estimate tool. You will need to have pay stubs (for you and your spouse if you are married and filing jointly), as well as your most recent tax return and information on any other income you may earn from self-employment or secondary agitation.
Increase your pre-tax contributions
Another way to reduce what you owe next April: Increase your contributions to certain accounts, such as traditional 401(k)s and IRAs, that are made using pretax dollars.
Although you will have to pay income tax when you eventually withdraw money from a 401(k) or IRA in retirement, you won’t be taxed initially. This means that every dollar you contribute to these accounts is deducted from your taxable income for the year in which you contribute.
For 2022, employees can contribute up to $20,500 or their salary to a workplace retirement plan such as a 401(k) or 403(b). You can also set aside an additional $6,500 as a “catch-up” contribution if you are 50 or older. “The most important thing most people can do is maximize their 401(k) or 403(b) contributions,” Garry says. “A lot of people can’t afford to make the maximum contribution, but you can increase what you contribute.”
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If you prefer the control offered by a traditional IRA, which you would open through a brokerage account and which doesn’t offer a limited menu of investment options like your 401(k), you can contribute up to $6,000 in such an account. in 2022, or $7,000 if you are 50 or older.
You may be able to lower your tax bill by contributing to an account designed for medical expenses, such as a Flexible Spending Account (FSA) or Health Savings Account (HSA).
Depending on your insurer and the plan you choose, you may be eligible for one or the other. But of the two, an HSA represents a more powerful option for reducing taxes and building long-term wealth, experts say. Indeed, they offer a triple tax advantage: contributions are tax-deductible, investments held in the accounts grow tax-free, and funds can be withdrawn tax-free to cover eligible medical expenses.
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