I don’t think it’s a stretch to say that nobody likes taxes. We love the benefits we get from taxes, but no one likes to see their hard-earned money taken away every paycheck. Unfortunately, taxes are a necessary evil and aren’t going anywhere. As you approach retirement, it becomes even more important to hold onto your money and increase your savings. One way to do this is to reduce how much you pay in taxes.
Here are four easy steps you can take to lower your tax bill as you near retirement.
1. Increase your catch-up contributions
One of the best parts of a 401(k) plan is that it allows you to contribute pre-tax money, lowering your taxable income and tax bill. To prevent people from turning away at If you pay a lot of money and not enough income tax, Uncle Sam sets a limit on how much you can contribute to your 401(k) annually. For 2022, the contribution limit is $20,500 unless you are 50 or older, in which case you can add an additional $6,500 in annual catch-up contributions.
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If you’re 50 or older and your retirement isn’t far away, it may be time to take advantage of the $27,000 you’re allowed to contribute to your 401(k). It results in the win-win situation by letting you save for retirement and save on taxes now.
2. Increase your standard deduction
A standard deduction is a fixed amount that taxpayers can use to reduce their taxable income, but you can only use it if you don’t itemize your deductions (such as writing off mortgage interest). For example, if you are single and earn $80,000 and take the standard deduction in 2022, only $67,050 will be taxed. The standard amount of the deduction depends on your filing status, whether or not someone can claim you as a dependent, and your age. These are the standard deductions for 2022:
|Submission Status||Standard deduction|
|Married filing jointly||$25,900|
|Head of the household||$19,400|
If you are 65 or older at the end of the tax year, you may receive an additional deduction, which may mean lowering your tax bill even further (or increasing your return). For 2022, the increase is $1,750 if you’re applying as a single person or head of household, or $1,400 if you’re married and applying together. If both you and your spouse are 65 or older, the standard deduction increases by $2,800.
3. Contribute to a Traditional IRA
While you technically contribute after-tax money to a traditional IRA, your contributions may be tax-deductible depending on your filing status, income, and whether or not you’re covered by an at-work retirement plan. Traditional IRAs get the same tax benefit as a 401(k), but they work the same way as brokerage accounts in that you can invest in any stock you want.
The maximum amount you can contribute to an IRA in 2022 is $7,000 if you are age 50 or older. If you want to lower your tax bill, consider taking advantage of a traditional IRA.
4. Use a health savings account
Unfortunately, health-related costs often increase as people age. Aside from your home or car, health care costs will likely be one of your top expenses when you retire. One way to prepare for those expenses is to use a health savings account (HSA). An HSA allows you to stash pre-tax money that you can use toward qualified medical expenses, including deductibles, coinsurance, co-payments, and more.
For most people, health costs will be unavoidable. So if you’re going to pay them anyway, you might as well put the money aside and get a tax break for it. If you have a high-deductible health plan, you can contribute up to $3,650 if you have self-insurance coverage and $7,300 if you have family coverage.
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