Let's be honest, most of us don't start thinking about our taxes until a lot closer to the April filing deadline. But getting ahead of your taxes could benefit you in the long run, not to mention allowing for smoother sailing during the upcoming tax season. The Internal Revenue Service (IRS) has already warned taxpayers that "refunds may be smaller in 2023" due to a number of changes this year, including the lack of a stimulus check in 2022 and reduced credit amounts. Fortunately, you have time to make some adjustments before the end of the year so you don't have to settle for a smaller refund. According to tax experts, there are five different things you can do by Dec. 31 to increase your 2022 tax return. Read on for these important end-of-the-year tax tips.
READ THIS NEXT: The No. 1 Reason You Could Get Audited by the IRS, Experts Warn.
1 | Make your home more energy efficient.
iStockGo green this year in order to get more green when filing your taxes in 2023.
According to Jessica Chase, a loan and finance expert at Premier Title Loans, you have a better chance of getting a bigger 2022 tax return if you "make your home more energy efficient" before the end of 2022. The IRS is currently allowing taxpayers to claim the Residential Energy Efficiency Property Credit by installing alternative energy equipment into their space.
"Before Jan. 1, 2023, homeowners that install solar panels, wind turbines, or geothermal heat pumps are eligible for a 26 percent tax credit," explains Michael Hess, a financial expert and the eCommerce strategy lead at Code Signing Store.
But for any installations made after this date, the available credit drops down to 22 percent. By making this change before the end of the year, you can maximize your return amount.
2 | Put more money into your retirement savings.
iStockIf you don't have time to invest in your home right now, invest in your retirement instead.
"The most important thing U.S. taxpayers can do before Dec. 31 to help increase their chances of getting a more significant tax return in 2022 is to maximize their contributions to retirement plans," Tommy Gallagher, a former investment banker and the founder of Top Mobile Banks, tells Best Life.
Gallagher advises people to contribute the maximum amount they are allowed to for their 401(k). "This will help to reduce taxable income and result in a bigger refund come 2022," he says.
But you have to do this before the end of year in order to make a difference: "Most 401k plans require employees to complete their retirement contributions by Dec. 31," explains Robert Farrington, a financial expert and founder of The College Investor. "In 2022 you can contribute up to $20,500 (plus an additional $6,500 in catch-up contributions for those over age 50)."
3 | Defer end-of-the-year bonuses.
iStockHoliday bonuses are common across many industries and are usually welcomed with open arms by employees. But Moira Corcoran, a certified public accountant and tax expert with JustAnswer, warns that this additional payment at the end of the year has to potential to push some people into a "higher tax bracket," which will result in them owing more in taxes.
To prevent this, Corcoran advises some taxpayers to consider deferring their holiday bonuses until after Dec. 31.
"Ask your employer if they can pay out your bonus in January instead," she says. "This pushes any tax liability on the bonus into the next tax year. This is helpful to keep you tax liability lower in the current year if the bonus will push you into a higher tax bracket."
For more financial advice delivered straight to your inbox, sign up for our daily newsletter.
4 | Donate to charity.
iStockYou can also benefit come tax time by helping others out before the end of the year.
Michael Collins, CFA, a financial professor at Endicott College in Beverly, Massachusetts, advises taxpayers to "make charitable donations" by Dec. 31 in order to better their chances of having a bigger return next year. "Donations to recognized charities are tax-deductible and can help reduce the amount of taxes paid in the subsequent year," he explains.
According to Collins, you should start by researching charities eligible for tax deductions and then determine the amount you want to donate. And you should also keep a detailed record of donations.
"For contributions of cash, check, or other monetary gift (regardless of amount), you must maintain a record of the contribution: a bank record or a written communication from the qualified organization containing the name of the organization, the amount, and the date of the contribution," the IRS explains on its website.
5 | Use tax-loss harvesting.
iStockAccording to Gallagher, taxpayers should also take note of their capital gain and losses for the year before Dec. 31.
"If people have had significant capital gains throughout the year, they should consider harvesting any losses to help to reduce the taxable amount," he says. "This means selling investments that have taken a loss to offset any profits they’ve made."
Using this tax-loss harvesting method can help you decrease your amount of taxable income and increase your chances of "getting a more significant tax return" next year, Gallagher explains.
But you don't have to go at it alone: "Like a lot of tax concepts, tax-loss harvesting is simple to understand but can be complex to execute well," warns Tom Wheelwright, a certified public accountant (CPA) and CEO of Wealth Ability. "You'll want to work with your CPA or tax advisor to ensure you don't run afoul of any of the rules, especially if you want to reinvest in the same securities you sold at a loss."
Best Life offers the most up-to-date financial information from top experts and the latest news and research, but our content is not meant to be a substitute for professional guidance. When it comes to the money you're spending, saving, or investing, always consult your financial advisor directly.
