Tax Season Hacks: Maximize Your Savings Before December 31st
Tax season is just around the corner, and while it officially starts early next year, there are several tax-savings steps you need to take before December 31st. This year, there are some lucrative opportunities to save on your taxes, thanks to the Inflation Reduction Act. These opportunities include upgrading the energy efficiency of your home and electrifying your vehicles. Don’t worry if it sounds complicated and time-consuming – we’ve got you covered. In this article, we’ll break down the steps you need to take to maximize your tax savings before the year ends.
1. Upgrade Your Home for Energy Efficiency
By making certain improvements to your home, you may qualify for a tax credit. Some of the improvements that may be eligible for a tax credit include:
– Home clean electricity products: This includes solar panels for electricity from a local provider and home back-up power battery storage with a capacity of 3 kWh or greater.
– Heating, cooling, and water heating: Electric or natural gas heat pumps, electric or natural gas heat pump water heaters, central air conditioners, natural gas or propane or oil water heaters, and natural gas or propane or oil furnaces or hot water boilers that meet or exceed specific efficiency tiers established by the Consortium for Energy Efficiency. Solar water heating products are also eligible if they are certified for performance by the Solar Rating Certification Corporation or a comparable state-endorsed entity.
– Other energy efficiency upgrades: This category includes oil furnaces or hot water boilers that meet or exceed 2021 Energy Star efficiency criteria, panelboards, sub-panelboards, branch circuits, or feeders that are installed according to the National Electrical Code and have a load capacity of 200 amps or more, insulation materials and systems that meet International Energy Conservation Code standards, and exterior windows that meet Energy Star’s Most Efficient requirements.
To claim the tax credit, file IRS Form 5695 with your tax return and keep your receipts.
2. Take Advantage of Electric Vehicle Tax Credits
If you’re planning to buy a new electric vehicle (EV) or fuel cell vehicle (FCV) for personal use in the U.S., make sure to buy and take delivery of the vehicle by the end of the year to qualify for a clean vehicle tax credit. The tax credit can be up to $7,500. However, to be eligible for the credit, your adjusted gross income must be below certain income thresholds, such as $300,000 for married couples filing jointly or $225,000 for heads of households.
To claim the credit, file Form 8936, Qualified Plug-in Electric Drive Motor Vehicle Credit, with your tax return and provide your vehicle’s identification number.
3. Maximize Your 401(k) Contributions
Take advantage of your company’s 401(k) plan by maximizing your contributions. Contributions to a traditional 401(k) are tax-deductible, while contributions to a Roth 401(k) are made with post-tax dollars and offer tax-free withdrawals in the future. The contribution caps for 2022 are $19,500 for employees or $26,000 if you’re over 50 years old. If your company offers a matching contribution, try to contribute at least up to the amount that your employer is willing to match.
4. Make Charitable Donations
If you itemize your taxes, consider maximizing your donations to IRS-qualified organizations. You can generally deduct up to 60% of your adjusted gross income for cash donations. If you’ve held appreciated assets for more than a year, such as stocks or property, you can generally deduct them at fair market value, up to 30% of your adjusted gross income. Consider setting up a donor-advised fund (DAF) to maximize your donations and disburse funds strategically.
Remember to obtain acknowledgment letters from the DAF or charitable organizations to claim your deductions accurately.
5. Optimize Your Investment Portfolio
Check your investment portfolio to take advantage of tax-loss harvesting. This strategy involves selling assets at a loss to offset taxable capital gains and potentially reduce your ordinary income taxes. You can offset up to $3,000 of your ordinary income with losses each year. By utilizing this strategy, you can save a significant amount on your taxes.
6. Understand Required Minimum Distribution (RMD) Rules
If you’re a senior with taxable retirement accounts, it’s vital to understand the required minimum distribution (RMD) rules. Failing to withdraw the full amount of your RMD by the due date can result in a hefty excise tax. To avoid penalties, know when you turned 72 years old. If you turned 72 this year, your first RMD must be taken by April 1, 2025. If you turned 72 before December 31, 2022, you should have already taken your first RMD by April 1 of this year and your next one by December 31st.
Seniors who are at least 70 ½ years old can also consider making qualified charitable distributions directly from their individual retirement accounts (IRAs) to satisfy all or part of their RMDs without adding to their taxable income.
As the year comes to a close, taking advantage of these tax-savings moves can potentially save you thousands of dollars. From upgrading your home for energy efficiency to maximizing your 401(k) contributions and making strategic charitable donations, there are various opportunities to reduce your tax liability. Additionally, understanding RMD rules and optimizing your investment portfolio can further optimize your tax strategy. Don’t wait until the last minute – start implementing these steps today to make the most of this year’s tax season.