9 Things You Can Do Now To Save Money on Taxes Next Year

by John Stapel

As the year ends, you might be wondering about next year’s tax bill.

Will you get a refund? Or will you owe Uncle Sam money?

Even if you’ve already earned most of your income for the year, you can still make changes to soften next year’s tax bite.

Don’t worry, we’re not talking about tax evasion, but there are some totally legit ways to keep more of your hard-earned dollars in your pocket.

9 Simple Ways to Pay Less Taxes in 2023

Here are several ways to save money on taxes before the new year begins.

  • Step up your 401(k) contributions
  • Max out a traditional IRA
  • Contribute to a health savings account
  • Don’t forget your FSA or dependent care expenses
  • Save money for your kid’s college fund
  • Pay off some student loan debt
  • Know your itemized deductions
  • Take advantage of tax credits
  • Adjust your withholdings

1. Step Up Your 401(k) Contributions

Lowering your taxable income is one of the best ways to pay less in taxes.

The easiest way to reduce your taxable income is to contribute to tax-deferred retirement accounts, like your company’s 401(k) plan or some other type of workplace retirement plan, like a 403(b) plan.

Money you contribute to a 401(k) is pre-tax money and it helps lower your taxable income for the year you make the contribution. Less income means less money you pay to the government.

So, if you make $50,000 in 2022 and contribute $3,000 to your workplace 401(K), it looks like you only made $47,000 in the eyes of the IRS.

For 2022, you can contribute up to $20,500 for those under 50, and up to $27,000 for those 50 and older. This doesn’t include the amount your employer contributes to your plan.

Woman managing the debt Getty Images

2. Max Out a Traditional IRA

Just like that company-sponsored retirement plan we were talking about, the funds you contribute to your traditional individual retirement account (IRA) don’t count toward your taxable income.

This type of retirement account is different from a Roth IRA, where contributions are taxed today but then grow tax-free thereafter.

For 2022, you can contribute up to $6,000 to an IRA, or $7,000 if you’re over the age of 50.

You have until April 18, 2023, to max out your IRA contribution for the 2022 calendar year.

An important caveat: You may not get the full tax benefit of contributing to both a 401(k) and an IRA if you or your spouse is covered by an employer-sponsored retirement plan.

If you have access to a 401(k), you need to make less than $68,000 in 2022 as a single person (or $109,000 as a married couple) to get the full IRA tax deduction. The tax benefit phases out for people with higher incomes who are covered by an employer retirement plan.

Head to the IRS website for full details on these phase-out limits.

3. Contribute to a Health Savings Account

A health savings account (HSA), is a great tax-exempt option if you have a high deductible health plan.

Your payroll contributions to an HSA are made with pre-tax income (aka you’re not taxed) and neither are your withdrawals, as long as they’re used to pay medical expenses that are qualified.

In 2022, the annual contribution limit is $3,650 for self-only coverage and $7,300 for family coverage. People 55 and older can contribute an extra $1,000 as a catch-up contribution

You can also make direct contributions to your HSA on your own and claim a tax deduction for that amount when you file your tax return. This can be a quick and easy way to reduce your tax burden before the end of the year.

Just remember: Your payroll HSA contributions and your personal contributions combined cannot exceed the annual limit.

You can leave funds in your HSA indefinitely since they’re not subject to required minimum distributions. (And if you’re like most of us, you’ll have more health care-related costs as you get older, anyway.)

4. Don’t Forget Your FSA or Dependent Care Expenses

A flexible spending account (FSA) is similar to an HSA in that you’re allowed to contribute pre-tax dollars from your paycheck each year.

And yes, that means you can reduce your taxable income with an FSA, therefore paying less in taxes.

The limit in 2022 is $3,050.

Keep in mind you’ll have to use up the money during the calendar year on qualifying expenses for you and qualifying dependents.

Have dependents — aka children or elderly members of your household — you’re taking care of? If your employer offers a dependent care FSA account, you can contribute up to $5,000 in pre-tax dollars to go toward expenses such as day care, after-school care and preschool.

Why not save money on child care and on your tax bill at the same time?

5. Save Money for Your Kid’s College Fund

If you’ve got kids, chances are you’re already gritting your teeth thinking about paying for college.

According to the National Center of Education Statistics, the average cost of college tuition is about $9,400 per year at a public school and $37,600 per year at a private institution (yikes!).

To help pay these costs and hopefully save yourself some money on taxes, consider opening a 529 savings plan.

This account is an investment vehicle specifically built for educational savings. You can use it to pay for your kids’ college tuition or even to send yourself or your spouse to school.

The exact tax benefits vary by state — more than 30 states offer full or partial tax deduction or credits on 529 contributions.

A group of women walk to class. Getty Images

6. Pay Off Some Student Loan Debt

Depending on your modified adjusted gross income (MAGI), you may be able to deduct up to $2,500 in student loan interest when you file taxes.

This is an “above-the-line” deduction, which means you can take it even if you opt for the standard deduction.

Borrowers can now apply for up to $20,000 in federal loan forgiveness now through Dec. 31.

If you still have a loan balance after receiving the forgiveness, consider paying off some interest on your loans before the end of 2022 to receive a tax deduction.

7. Know Your Itemized Deductions

Several tax deductions are only available if you itemize.

A majority of Americans — about 85% — take the standard deduction, which is $12,950 for single filers or $25,900 for joint filers for the 2022 tax year.

Itemizing only makes sense if you have enough deductions to exceed the standard deduction — which most people don’t.

If you itemize your taxes, here are a few deductions that can help lower your tax bill.

Major medical bills: In general, if you’ve spent more than 7.5% of your adjusted gross income (AGI) on qualified medical expenses, you may be able to write them off if you itemize your deductions.

Charitable donations: Looking for a way to pay less in taxes … and get that warm, fuzzy feeling? Charitable contributions are tax-deductible if you itemize your deductions. Make sure to track the estimated value of your contributions to save you time when you file.

Mortgage interest and local property taxes: These may both be eligible for partial deductions, though you’ll need to itemize your tax return.

Business-related deductions: If you’re a freelancer or you work from home, you should also look into business-related deductions, like the cost of your home office space.

You might also be able to deduct certain supplies, travel expenses and even meals and entertainment.

8. Take Advantage of Tax Credits

In certain scenarios, the IRS extends tax credits to eligible taxpayers. Tax credits count as an actual reduction of your total tax bill. (Remember: Tax deductions reduce your taxable income.)

If the tax credit is refundable, you’ll get a refund if your tax credits exceed what you owe.

For instance, if you would have owed $500 and claim $1,000 in tax credits, not only will your payment be waived — you’ll also receive a $500 tax refund.

Here are a few tax credits you may qualify for:

American Opportunity or Lifetime Learning Credits: Depending on your enrollment status, AGI, and how you’ve paid for educational expenses, you may be entitled to the American Opportunity or Lifetime Learning Credits. (Check out this quick quiz from the IRS, which will tell you if you’re qualified in just 10 minutes.)

Earned Income Tax Credit: Low- to moderate-income workers may be eligible to claim the Earned Income Tax Credit, one of the federal government’s largest refundable tax credits. You could be eligible for up to $6,935 in federal income tax credits, though the exact amount depends on your income, marital status and number of qualified dependents.

You can also qualify as a single person with no dependents if your AGI is below $16,480 in 2022. (College students and retirees with part-time jobs — we’re looking at you.) For details, check out the IRS’ Earned Income Tax Credit fact sheet.

Saver’s Credit: If you’re a low- or middle-income worker, you can claim the Saver’s Credit by adding money to a 401(k) or IRA. The credit is worth up to $1,000 for single filers or $2,000 for married couples.

Your AGI needs to be below $34,000 if you’re single or $68,000 if you’re married to qualify for the Saver’s Credit. But get this: You can claim the credit in addition to any tax deduction you receive by making qualified retirement savings contributions.

9. Adjust Your Withholdings

The W-4 tax form is one you give to your employer specifying how much of your wages should be withheld for taxes.

It might seem intuitive to keep your withholdings as low as possible to keep more of your paycheck. However, if you find you owe taxes in April, you might want to go in and tweak your withholding claim so you don’t run into the same problem each tax season.

Jamie Cattanach is a former contributor to The Penny Hoarder. 

Rachel Christian is a Certified Educator in Personal Finance and a senior writer for The Penny Hoarder.

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