Everything you need to do to set yourself up for success when you pay taxes this year, and moves to make now for next year based on 2022 tax changes.
The mere mention of April 15 stirs financial anxiety for many. No matter how long you’ve been paying taxes, they can still be a stressful part of the year, especially since the rules change frequently. It’s important to read the fine print, research, and if you need to, hire a professional to guide you through the process.
We checked in with experts on their best, most cost-effective recommendations for tax strategies:
MAXIMIZE YOUR CHARITABLE GIVING
Many charities struggled in 2021 as donations for many are down. As of now, individuals, including married individuals filing separate returns, who take the standard deduction can claim a deduction of up to $300 on their federal income tax for charitable donations to qualifying organizations. For married individuals filing a joint return, the maximum deduction is increased to $600.
Before you make that donation, however, make sure that the charity you’re giving to is a qualifying organization. The IRS has a way to check the legitimacy of nonprofit organizations: the Tax Exempt Organization Search (TEOS) tool. No matter which organization you decide to donate to in 2022, make sure you keep a record of your donation. Ask for a receipt and keep it with your documents to make filing next years taxes a breeze.
IF YOU’RE SELF-EMPLOYED, CONSIDER A SEP IRA
More than 38 million Americans left their jobs in 2021. Some of them tried their hands at freelancing and quickly found it worked for their lifestyle. If you’re self-employed, you need to think strategically about retirement. Josh Zimmelman, the managing partner at Westwood Tax & Consulting, suggests opening a SEP IRA, rather than a Roth IRA since a SEP allows you to contribute more on an annual basis. For 2022, an employer (that’s you!) can contribute as much as 25% of an employee’s gross annual salary, or up to $61,000. Also, another benefit is that you have up until tax day — April 15, 2023 — to make the transfer, Zimmelman reminds.
TAKE A LOOK AT YOUR PRIVATE MORTGAGE INSURANCE (PMI) PREMIUMS –
2021 was the last year there is a tax benefit to keeping your PMI. From 2007 through 2017, PMI premiums were deductible, but Congress let this deduction expire. However, Congress revived it with the Further Consolidated Appropriations Act and made it effective from January 1, 2019, through December 31, 2020, and then made a last-minute decision to extend it one more year through 2021 with new tax changes.
There is currently legislation pending that would make the previous deduction permanent and increase the income level for families who can qualify through the Middle Class Mortgage Insurance Premium Act. “It’s anyone’s guess on when or if that might happen,” says Heather Rose, Partner at Acadia Lending Group. “But the bill seems to generally have bi-partisan support. As for what to do this year? Rose suggests three action items: call their senators to insist they support the pending legislation, pay down your debt, and/or refinance to remove their PMI. “PMI deductibility, the increased standard deduction, and limits to state and local tax deduction, has resulted in fewer taxpayers currently taking advantage of itemizing deductions,” Rose says. “Paying down debt and avoiding the extra expense is even more advisable than in the past.”
HAVE MORE BUSINESS MEALS (EVEN THOUGH MEETINGS ARE LIMITED)
You probably aren’t dining out too often these days, but if you’re ordering in Seamless for a client to discuss finances, goal-setting and so on, make sure to claim that expense on your taxes. As Zimmelman explains, typically, business meals are only 50% tax-deductible, but a new temporary revision allows a 100 percent deduction for any qualifying meals incurred through December 31, 2022.
STAY IN (OR HEAD BACK TO) COLLEGE
If you’ve been on the fence about going to graduate school to advance your degree, now might be the time to dig your heels in and do it finally. And there are tax breaks to make it easier on your finances.
The lifetime learning tax credit (LLTC) can help pay for tuition and related expenses for undergraduate, graduate, and professional degree courses. The American opportunity tax credit (AOTC) is a credit for education expenses for an eligible student for the first four years of higher education. “Generally, one would use the AOTC for undergraduate school and the LLTC for graduate school and continuing education,” says Mark Kantrowitz, a financial aid expert and author of bestselling books about paying for college. He highlights the differences between the AOTC and LLTC
- The AOTC is available for just four years, while the LLTC is available for an unlimited number of years.
- The AOTC is partially refundable, while the LLTC is not, meaning that you have to have a tax liability to offset.
- The AOTC is worth up to $2,500, based on up to $4,000 in qualified expenses (100% of the first $2,000, 25% of the second $2,000). The LLTC is worth up to $2,000, based on 20% of up to $10,000 in qualified expenses. Thus, the AOTC is worth more than the LLTC.
- The AOTC is per student, while the LLTC is per taxpayer.
- The student must be degree-seeking and enrolled on at least a half-time basis to qualify for the AOTC but not the LLTC. So, the LLTC can be used for less-than-half-time enrollment, such as for continuing education.
START USING THE OFFICE-IN-HOME DEDUCTION
Though it’s true that nearly everyone worked from home at least part of the year in 2020, only sole proprietors or self-employed individuals are eligible for the office-in-home deduction. If you are part of this crew, it’s essential to take advantage of this tax savings, since unlike other years where it might have raised a red flag for being audited, Maio says this year it will be expected due to the pandemic. When done correctly, he notes this deduction can be quite substantial. Just make sure you’re following the rules, with the biggest being the space you deduct must be used exclusively for conducting business. “That means you use the space exclusively and regularly for administrative or management activities, such as billing customers, setting up appointments and keeping books and records,” he explains. It can’t be part of a playroom, spare bedroom, living room, or any other space since it must genuinely be an office.
As far as what the office-in-home deduction entails, Maio says it is basically any and all expenses pertaining to your home, apartment or condo. There are two ways to calculate your deduction. With the first option, you calculate the percentage of your home’s square footage that you use for work. That percentage of your mortgage, rent, property taxes, utilities, repairs and maintenance, etc., becomes deductible. “One thing to keep in mind about this method is that you’re required to depreciate the value of your home, which can be a tricky calculation,” he says.
The second — and more straightforward — approach lets you deduct $5 per square foot of home used for business, up to 300 square feet, or about a 17-by-17-foot space. “You won’t have to keep as many records with this option, but you might end up with a lower deduction, so consider calculating it both ways before filing,” Maio recommends.
MORE ON HERMONEY:
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- Do I Have To Pay Taxes On Side Hustle Income?
- When To Do Your Taxes Yourself Or Hire An Expert
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