At this point, the 2022 tax filing season is just a memory for many filers. But if you’re the type of person who tends to think a lot about taxes, then you might already be dreading the 2023 filing season. This especially applies if you tend to owe money to the IRS.
The good news, however, is that you’re not doomed to write a big check next year. If you take these steps as soon as possible, you can prepare to pay less tax to the IRS in 2023 – without breaking the law in any form.
1. Maximize your IRA contributions
An IRA allows you to save money for your retirement in a tax-efficient way. There are now two main types of IRAs you can open: a Traditional IRA and a Roth IRA.
A Roth IRA will not give you immediate tax relief on the money you invest in it. But a traditional IRA will. And so, if you max out a traditional IRA this year, you’ll protect some of your income from taxes.
Currently, you can contribute up to $6,000 per year to an IRA (whether traditional or Roth) if you’re under age 50. If you are 50 or older, this limit is $7,000.
If you’re 45 and contributing the maximum this year, that means the IRS won’t be able to tax you on $6,000 of income. The result? A lower bill at tax time.
2. Wait at least a year and a day before selling investments in a brokerage account
When you sell investments at a profit in an IRA, you are not taxed on that money immediately. Instead, the gains are tax-deferred with a traditional IRA, and you don’t have to worry about taxes on them until you start taking withdrawals from your account. (With a Roth IRA, investment gains are tax-free.)
But if you sell investments at a profit in a regular brokerage account, you will be pay taxes on those gains as soon as possible. In fact, if you lock in gains in your brokerage account this year, you’ll have to pay when you file your 2022 tax return in 2023.
That’s why it’s important to make sure you hold your investments for at least a year and a day before selling them for a profit. If you choose this route, it will count as long-term capital gains, which are taxed at a much lower rate than short-term capital gains. Short-term capital gains are those that apply to investments you hold for one year or less before the sale.
3. Buy a house
Obviously, you can’t just snap your fingers and become an owner overnight. But if you’ve saved up for a home purchase and are able to fast-track your search, you could benefit tax-wise.
There are various tax breaks available to you as a homeowner, and one of the most important is the ability to deduct the interest you pay on your mortgage (to be clear, this does not mean that your entire payment mortgage is tax deductible). You can also deduct any property taxes you have to pay, although depending on their amount and how your local income taxes look, you may only be able to deduct part of your property tax bill. (and some owners may not benefit from this deduction at all).
Nobody likes to pay more taxes than necessary. If you can take these steps quickly, you can set yourself up to be a much happier person when it comes time to file your 2022 return next year.
Check Out The Ascent’s Best Tax Software for 2022
We are firm believers in the Golden Rule, which is why editorial opinions are our own and have not been previously reviewed, approved or endorsed by the advertisers included. The Ascent does not cover all offers on the market. The editorial content of The Ascent is separate from the editorial content of The Motley Fool and is created by a different team of analysts. The Motley Fool has a disclosure policy.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.