- If you received a big tax bill this year, directing your employer to withhold more from each paycheck can prevent another nasty surprise next year, tax pros say.
- Upping your pre-tax contributions to accounts such as traditional 401(k)s and IRAs is another way experts recommend trimming your tax bill for next year.
For many people, the start of May comes with the blissful knowledge that that you won't have to think about your taxes for another 11 months. But if last month's tax deadline came with high levels of stress or, worse, a big surprise bill, now may be the time it's worth thinking about making some changes to avoid running into the same problems next year.
There's no guarantee that the rules come next April will be the same as this year's, notes Mark Jaeger, vice president of tax operations for TaxAct. Even if Congress doesn't pass sweeping reforms, tax rules nearly always change from year to year, he says. "It's never apples to apples."
Still, you can learn from this April's mistakes to make sure you're not in the same boat next spring.
"I always tell clients that if you're an employee for a company and you find that you're short, and it's tax time and you're owing money, one of the things that you could do is file a new W-4 form," Jaeger says. That's the document you submit to tell your employer how much of your salary to set aside for taxes from each paycheck.
"That is kind of the easiest and simplest thing to do to avoid having to pay more in taxes come next tax season," he adds.
If you haven't changed jobs in a few years, you may not have noticed in 2020 when the IRS revised Form W-4. For some people, revisions in the form changed the calculus behind what they had withheld, notes Michael Garry, founder and CEO of Yardley Wealth Management.
"One thing people have run into this past year was that they didn't have enough withheld," he says. "This is the second year using the new W-4, and people who had ordinarily been close to paying the right amount wound up owing more than they ever have. They got a big surprise, and not in a good way."
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If you ended up underpaying throughout the year and saddling yourself with a big bill for tax year 2021, adjusting your withholding now can help make sure you won't owe a big bill for 2022.
To do so, you'll have to file a new W-4 with your company's HR department. To determine how much more to have withheld, plug your information into the IRS's withholding estimator tool. You'll need to have paystubs (for you and your spouse if you're married and filing jointly), along with your most recent tax return and information about any other income you may earn from self-employment or a side hustle.
Although you'll have to pay income tax when you eventually withdraw money from a 401(k) or IRA in retirement, you won't be taxed up front. That means that every dollar you contribute to these accounts counts against your taxable income for the year in which you make the contribution.
For 2022, employees can contribute up to $20,500 or their salary to a workplace retirement plan such as a 401(k) or 403(b). You can also stash an additional $6,500 as a "catch-up" contribution if you're age 50 or older. "The biggest thing that most people can do is maximizing their 401(k) or 403(b) contributions, says Garry. "A lot of people can't afford to make the maximum contribution, but you can increase what you're contributing."
Video by Courtney Stith
If you prefer the control offered by a traditional IRA, which you'd open through a brokerage account and won't come with a limited menu of investment options like your 401(k) might, you can contribute up to $6,000 in such an account in 2022, or $7,000 if you're 50 or older.
Depending on your insurance provider and the plan you choose, you may be eligible for one or the other. But of the two, an HSA represents a more powerful option for slashing taxes and building long-term wealth, experts say. That's because they come with a triple tax advantage: Contributions are tax deductible, investments held in the accounts grow tax-free, and the funds can be withdrawn tax-free to cover qualifying medical expenses.
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