Tax Saving Tips for Your 2022 Return and the New Tax Year

January 2023

<p>Tax Saving Tips for Your 2022 Return and the New Tax Year</p>

The new year offers a fresh start in many ways. But January 1 also kicks off the season to settle up on taxes from the year before. The good news when preparing to file your 2022 return is that you can usually lower your tax bill using credits and deductions. That’s an especially welcome reminder, given how inflation impacted purchasing power and savings in 2022. 

It’s easy to take advantage of tax adjustments that can help maximize your refund (or at least lower what you owe) for 2022. Follow these guidelines – with tips on how to save you money – to help you navigate this tax season.

Let’s Begin

Mark your calendar to get a sense of the timeline ahead for your 2022 return. This year, all state and federal tax returns and payments are due Tuesday, April 18. Don’t wait. Even if paperwork, such as a W-2 from an employer, has not arrived yet, it’s smart to research the tax credits and deductions you may qualify for. Many are mentioned below. 

One of the biggest choices at the outset of tax prep is whether to take the standard deduction or itemize your deductions. 

  • Standard deduction. Generally, taking the standard deduction is considered the easier route, but you could be leaving savings behind. For tax year 2022, the IRS raised the standard deduction to adjust for inflation. For most singles, it’s $12,950. For most married couples filing jointly, it’s $25,900.
  • Itemizing deductions. This is likely worth pursuing when your qualified expenses add up to more than the standard deduction. Run a cursory calculation to gauge if itemizing could lower your tax bill, especially if you are self-employed, live in an area with high taxes or own a home. As in recent years, there is no limit on itemized deductions for the 2022 tax year.

Smart Actions

Follow these tips as you work through your 2022 taxes.

  • Make a contribution

    You can still make contributions to certain accounts in 2023 to help lower your 2022 taxes. Until Tax Day, you can contribute to an individual retirement account (IRA) or health savings account (HSA) to lower your 2022 taxable income.

    • IRA contributions are limited to $6,000 – or, if you are 50 or over, $7,000.

      It’s important to note that any Roth IRA withdrawals you make this year will be tax-free, in most cases. Some penalties may apply, so it’s always a smart idea to check the IRS website to gain clarity on your specific circumstances.

    • HSA accounts, with high-deductible health plans, can be funded up to $3,650 for an individual policy or $7,300 for a family policy. Earnings interest in HSA accounts is tax-free.
    • Remember that 401(k) contributions made during a calendar year are deductible – up to $20,500. If you’re 50 or older, the catch-up contribution is $6,500.

    • Note that contributions made by or through an employer have already been deducted from your taxable income, so no additional steps are required on your return. Contributions to a flexible savings account, or FSA, through an employer have also been deducted from your taxable income.

  • Look above the line

    See if you qualify for “above-the-line deductions.” These can be claimed even if you claim the standard deduction and provide a tax break by lessening your overall gross income. (IRA and HSA contributions are examples.)

    When filing a standard tax return with Form 1040, look for these half-dozen deductions above “adjusted gross income,” or AGI.

    A perennially popular above-the-line deduction is student loan interest (up to $2,500 for 2022). Additional tax forms may be necessary to claim these deductions.

  • Tax credit(s)

    Tax credits allow you to directly subtract dollar amounts from the income taxes you owe. Thus, tax credits can make a significant difference in your bottom line. One example is the Child Tax Credit, through which you can receive a credit of up to $2,000 per qualifying child.

    Credits come in two categories – refundable or nonrefundable. If the credits you claim are refundable and add up to an amount greater than your tax bill, the difference is refunded to you. If nonrefundable credits amount to more than what you owe, your refund is zeroed out.

  • Medical deductions

    Deducting medical expenses while itemizing can significantly reduce your taxable income – but make sure you qualify.

    Out-of-pocket medical expenses must exceed 7.5% of your AGI to be deducted. These could include prescription drug and eyewear costs, and most medical payments. You may be able to deduct your premium costs entirely if you’re self-employed and managing your own health insurance coverage.

  • Save on state or sales taxes

    If itemizing your deductions, compare the amount you paid in sales tax in 2022 with your cumulative taxation by state and local governments. You can deduct the larger of the two amounts from your federal income taxes.

    Those claiming the sales tax break should make sure to have the receipts for especially large purchases (such as an appliance or car), in case of an audit. The IRS also offers a worksheet to calculate sales tax estimates.

Lessen Your Liability

If you or your family experienced significant life events during the 2022 tax year, you may catch a break from the IRS.

  • Getting married. Filing jointly with a spouse typically lowers your taxes. In some situations, filing jointly may increase what you owe, so it’s wise to calculate your tax bill both ways.
  • Family additions. Welcoming children to your household can lower your federal tax liability significantly through credits. Common ones, such as the Child Tax Credit and the Earned Income Tax Credit, can wipe thousands of dollars off your bill.
  • Income changes. You may have joined a different tax bracket, so check your 2022 income against the latest tax tables, which also can change from year to year.
  • Buying or selling a home. Itemized deductions are allowed for real estate taxes, mortgage interest and other aspects related to selling and buying homes. On the seller side, you can avoid paying taxes on gains of up to $500,000 if you file jointly.
  • Retirement savings and distributions. Remember, 401(k) and IRA contributions are tax deductible, but most distributions from these accounts are taxed. 
  • Inheritance. Most forms of inheritance are tax-free at the federal level. However, distributions from retirement accounts are likely to be taxed, as are gains on sales of property and other types of inherited assets. 

Information Pays Off

It never hurts to be informed, especially when it comes to your finances. But there’s no replacement for consulting a tax professional if you’re aiming to maximize savings when filing your 2022 return. At tax time, or at any time, the KeyBank team stands ready to assist you for all your financial needs.

Look for part two of our series on tax savings in the March eNewsletter.

This material is presented for informational purposes only and should not be construed as individual tax or financial advice. KeyBank does not provide legal advice.

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