Spring is in the air, and it’s time to start planting seeds! But we’re not talking about flowers or vegetables – we mean the tax-savings variety. We often think of December as the time to do tax planning, but there are a lot of ways that you might be able to get a larger refund (or owe a lesser amount) if you have a bit more time to let ideas grow. Read on for some ideas:
Child/Dependent Tax Credit – Do you have dependents in your household? If you have children under age 17, you may be able to claim a tax credit of $2,000 for each of them. The year your child turns 17, the tax credit drops to $500, so be sure to adjust your withholding accordingly! This $500 credit may also be extended to any qualifying relative(s) if you are able to claim them as a dependent on your return.
Energy Tax Credit – Have you been contemplating some major home improvements? Are you interested in saving energy, too? With the passage of the Inflation Reduction Act in August 2022, taxpayers now have an extra incentive to make energy efficient improvements on their homes. There are a wide variety of tax credits available, with a maximum credit of generally $1,200/year. See the IRS’ guidelines here. If your project can be done in phases, you may want to do it over several years in order to maximize the tax savings. Just keep in mind that these credits will phase out after 2033.
Education Tax Credit – If your income qualifies, and if you pay costs from the right type of account, there are several tax credits available for those with kids in college. We are big fans of the American Opportunity Tax Credit (AOTC), which provides a $2,500 tax credit toward the first $4,000 of annual eligible expenses. After the AOTC has been used for four years, the Lifetime Learning Credit may be available, which provides a maximum tax credit of $2,000 when other guidelines are met.
Increase Pre-tax Contributions – Has it been a while since you last bumped up your contributions at work? The limits for retirement and health savings accounts creep up a little bit each year, and you’re also allowed to make extra contributions once you reach certain ages (varies by type of plan). In addition to saving more toward your retirement goal, you’ll also reduce your taxable income, bringing your tax bill down. If your goal is to max out your contributions, it’s better to adjust the amounts earlier in the year, when you have more months to spread the change across.
Itemize Deductions – Well, maybe. For many taxpayers, the best strategy will be to take the standard deduction. But in years when you have extra-high medical costs, pay sales taxes on a major purchase, or make a substantial charitable donation, it may pay off to itemize instead. Since you never know what might unfold as the year progresses, keep receipts for medical, dental, prescriptions, big purchases (think vehicles, remodeling, etc.), donations, etc., in your tax file so you don’t have to go searching for them at tax time next year. Every so often, it could pay off!
Do Tax Planning – As part of our regular reviews with clients, we often prepare tax estimates to check past tax withholding levels and to forecast taxes for the upcoming year. The tax planning portion of these meetings can be very impactful, resulting in adjustments such as:
- Avoiding unnecessary tax penalties by sending in sufficient tax payments and ensuring that excess contributions are removed in a timely manner
- Harvesting tax losses to offset gains
- Use of tax-efficient investment vehicles, such as municipal bonds and exchange traded funds (ETFs)
- Reducing taxable income to save on income-dependent services (Medicare premiums, property taxes, etc.) and maintain eligibility for certain tax credits
So, in addition to enjoying more daylight, feeling warmer weather, and watching plants starting to flower, we encourage you to think about how you could save on future taxes. Talk with your planner, who is happy to help evaluate your current and future tax situation and help devise a plan.
Johnson Bixby and Private Client Services do not offer tax or legal advice. Always consult a professional regarding your specific situation.