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To significantly reduce your taxes now and in the future, you need to plan ahead. There are several strategies you can adopt to lower your tax bill.
If you are in the 32% tax bracket and you contribute the maximum for 2022 ($20,500 or $27,000 for taxpayers 50 and over) towards a pre-tax 401(k), your federal taxes can be lowered by around $6,000. If this is not possible, you should at least contribute the maximum amount that will be matched by your employer if they offer an employer matching program.
Health Savings Account, or HSAs, are perhaps the most underutilized tax-advantaged way to grow our money. Like a Roth, earnings are tax-free, but HSAs are also tax-deductible. So you save on taxes now and in the future. Your HSA earnings are tax-free if you use it for qualified medical expenses in the future.
Depending on which tax bracket you are in, and whether you can absorb a slight reduction in your take-home pay, consider switching all your future contributions from pre-tax to a Roth 401(k), if it’s an available option. This way, you will be able to pay taxes while your tax bracket is low, and thus avoid paying higher taxes when tax rates go back up.
There are many tax credits available. Each year the IRS releases the tax credits and deductions available to filers. It’s important that you take advantage of every tax credit that you are entitled to. Tax credits reduce the amount of tax that you owe, not just your taxable income
Roth IRAs are taxed up front. If you are eligible, the tax savings could be immense. While your Roth IRA contributions don’t lower your tax bill today, the money you withdraw when you retire, including earnings, will be tax-free.
You can take advantage of a charitable tax deduction through a standard donation or itemization. You can claim up to $300 in donations for the standard deduction. These donations must have been made in cash to 501(c)(3) charitable organizations. Cash donations include those made by credit card, check, or debit card.
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