HomeBusinessLesser known ways to reduce your 2022 tax bill or increase your refund
Lesser known ways to reduce your 2022 tax bill or increase your refund
November 25, 2022
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1. If your income is higher in 2022, postpone your bonus until 2023
If you’ve had a strong year and expect lower earnings in 2023, try delaying a holiday bonus until the new year, experts say.
“It’s always exciting to reap the rewards of hard work by getting a year-end bonus,” said Lisa Greene-Lewis, a CPA and tax expert at TurboTax. “But sometimes it can bump you up into a different tax bracket.”
But by receiving the money in January, you can reduce 2022 income without waiting too long for the funds, provided your business allows it, she said.
2. Prepay future medical expenses for deduction
Claiming a deduction for medical expenses is not easy. For 2022, there are tax credits for unreimbursed medical expenses that exceed 7.5% of your adjusted gross income. But can only claim it if you specify deductions.
Typically, you’ll itemize whose deductions — including charitable gifts, medical expenses and more — exceed the standard deduction, which is $12,950 for single filers or $25,900 for married couples filing jointly for 2022.
Although it’s difficult to plan for medical expenses, you’re more likely to maximize the deduction by “pooling” expenses for two years into one, explained certified financial planner Marguerita Cheng, CEO of Blue Ocean Global Wealth in Gaithersburg, Maryland.
For example, with multiple children in orthodontic braces, you could ask to prepay the remaining balance before the end of the year if you can afford it, she suggested. “The provider may also give a discount for paying everything earlier,” said Cheng, who is also a member of CNBC’s Financial Advisor Council.
Of course, you must first project your adjusted gross income, total itemized deductions, and calculate your past medical expenses in 2022.
3. ‘Maximize Your Bracket’ with a Partial Roth Conversion
With S&P 500 index down about 15% for 2022, you might see a Roth Individual Retirement Account conversion, which transfers pre-tax funds to a Roth IRA for future tax-free growth. The trade-off is that you owe advance tax on the converted amount.
The strategy pays off when the market falls because you can buy more shares for the same dollar amount and there is a chance for tax savings on the converted portion.
But depending on your income level, you can also consider a partial conversion annually, experts say.
“The bottom line is, if you’re retired or close to retirement and your income has decreased, then you want to consider filling enough to maximize your bracket,” said Thomas Scanlon, a CFP and CPA at Raymond James in Manchester, Connecticut.
For example, if you’re already in the 24% bracket, it’s possible there’s still room for more income before you trigger 32% on the excess amount, he said.
Scanlon said partial Roth conversions work well for retirees who are “light and asset heavy,” like someone leaving the workforce with several years before they need to start taking required minimum distributions.