By Harriet Edleson
There’s still time for smart tax preparation that could lower your bill
Tax filing season just opened for 2022 returns, and the IRS is already warning that average refunds may be lower since most pandemic economic relief measures are finished. That means careful tax planning is more important than ever if you want to lower the amount you owe.
Though it’s too late to take advantage of many tax strategies that needed to be accomplished before the end of the tax year, there are some things you can still do to have a better tax result for 2022.
“Get the deductions that you’re entitled to,” says David Peters, a CPA based in Richmond, Va.
Here’s what seniors can do to make the most of their deductions and credits.
1. Be aware of key taxpayer dates
For most people, April 18 is the due date for your federal 2022 tax return. That’s also the last day to request an extension and pay any tax owed, which you have to do even if you’re filing an extension. If you live in Maine or Massachusetts, it’s April 19, and if you live in a state that declares a disaster, you may have even more time. For example, Californians affected by winter storms qualify for an extension to May 15, 2023 to file individual and business tax returns.
You need to file by Oct. 16 if you request an extension on your 2022 tax returns. If you need help to meet these deadlines, you can check with the IRS for its tips for seniors filing their taxes.
An extra tip: File an electronic return and choose direct deposit for any refund. It’s the fastest way to file and receive a refund, according to the IRS. Further, avoid filing paper returns whenever possible.
2. Make last-minute contributions
Most of your tax situation will have been settled by Dec. 31, but there are a few things you can do up until the tax deadline to lower your tax burden. You might make the biggest impact with a contribution to a traditional IRA if you have earned income from a job, which you can do up until your tax filing deadline. “That’s still an opportunity that’s on the board,” says Peters.
You can contribute to a traditional IRA at any point, as the age limit restriction was removed during the pandemic. You can even make this contribution if you’re already taking required minimum distributions from the account. For 2022, the total amount you can contribute is $7,000 if you’re 50 or older, according to the Internal Revenue Service.
If you don’t need the extra deduction of a pretax contribution, you could instead contribute up to the $7,000 limit in 2022 into a Roth IRA if you have earned income, and then the amount would not be subject to RMDs and the growth would be tax-free.
If you haven’t yet enrolled in Medicare, you can also make a pretax contribution to a health savings account if you have a high-deductible health plan that qualifies, but you can’t any longer once you’re in the program.
3. Weigh your standard deduction vs. itemizing
The standard deduction if you are single or married and filing separately is $12,950 for 2022, and you get an extra $1,750 if you’re 65 or older. If you are married and filing jointly the standard deduction is $25,900; for those 65 and older, the additional standard deduction is $1,400 per qualifying person, according to the IRS.
That may make a difference as to whether you claim that or itemize deductions, such as medical expenses above the IRS limit and charitable contributions.
4. Consider any expenses you can take against “gig” income
Are you consulting in retirement or turning a hobby into a side gig? You can write off any expenses that are “ordinary and necessary” and considered “reasonable,” according to the IRS. “There are a lot of missed deductions,” said Peters, so check your bank and credit card statements for possible deductions against business income.
For example, if you have been using your vehicle to earn this income, you can deduct 58.5 centers per mile for use between Jan. 1 and June 30, 2022. The standard mileage rate rose to 62.5 cents per mile from July 1, 2022 through the end of the 2022 calendar year.
Remember to keep careful records for any deductions you take on your tax return. “You generally must have documentary evidence, such as receipts, canceled checks, or bills, to support your expenses. Additional evidence is required for travel, entertainment, gifts, and auto expenses,” says the IRS.
5. Assess your Social Security tax burden
If you receive Social Security, you’ll need to determine whether you owe federal income tax on it, as well as state income tax, and how much. The majority of states do not tax Social Security income but 12 do: Colorado, Connecticut, Kansas, Minnesota, Missouri, Montana, Nebraska, New Mexico, Rhode Island, Utah, Vermont, and West Virginia. How much tax you owe depends on your “combined income,” which the Social Security Administration defines as including half of your Social Security benefit plus other income.
6. Check your RMD payment
You need to withdraw your required minimum distribution (RMD) if you were born in 1950 or earlier by Dec. 31, but you’ll calculate the tax on the income when you file your return. RMDs are minimum amounts that many retirement plan and IRA account owners must withdraw each year after they reach age 72, according to the IRS. The age that RMDs begin will increase to 73 in 2023. If you start looking at the numbers and realize you didn’t take the right amount, correct it as fast as you can and talk to a tax professional about how to ask for forgiveness for the penalty and fees.
7. Remember the first estimated tax payment for 2023 is also due
If you typically make quarterly estimated tax payments, the first quarter 2023 payment is due the same day as your 2022 tax return. Quarterly estimated taxes are typically paid by those who plan to file a sole proprietor Schedule C with their 2023 return or are a partner or S corporation shareholder, and expect to owe tax or $1,000 or more when their return is filed.
To get a jump on your 2023 taxes, you can also use the IRS withholding tool to help you estimate how much federal tax you want withheld from your W-2 income from your employer.
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