Whether you win the lottery, cash in at the casino, get an inheritance from your great-aunt, or just find some money you never knew you had stashed away, receiving a windfall is a terrific way to stabilize your finances and establish a firm foundation for savings and retirement. However, depending on the source, the US government may want a piece of the action. This implies you may be required to record your newfound wealth on your yearly tax return. Below are some suggestions to help you reduce your tax burden while still paying your fair amount.
- Investigate the taxes you may owe the IRS on any windfall you get.
- A significant portion of your taxable income may be reduced in a variety of ways.
- Contribute to an IRA or an HSA to help reduce your yearly tax burden.
- To reduce your tax obligation, consider selling your investments at a loss.
- Make careful to take advantage of any overlooked credits or deductions, such as those for education and health care.
1. Understand Tax Implications
Before you start worrying, learn about the tax requirements for your unique source of income. If the revenue comes from a lottery or an employer, you must pay full taxes on the income in your tax rate. Different criteria apply in other sources. As an example:
- If your income is derived from investment gains, you must pay capital gains tax, which was amended by the Tax Cuts and Jobs Act (TCJA), which was signed into law on December 22, 2017.
- If your regular income is less than or equivalent to $40,400 (for singles) or $80,800 (for married couples filing jointly), you are exempt from paying capital gains tax. You pay 15% if your income is higher than $40,400 (for a single person) or $80,800 (for a married couple filing jointly), but less than or equal to $445,850 (for a single person) or $501,600 (for a married couple filing jointly).
- Your capital gains tax rate is 20% if your income exceeds the 15% level. There are certain instances in which some capital gains may be taxed at a rate greater than 20%.
2. Fund an IRA
The first place to look for ways to save money on taxes is in your retirement savings. Contributions to regular IRAs or 401(k) plans are tax deductible. That means you don’t have to pay taxes on the money you put into an IRA.
For 2021 and 2022, the cumulative contributions to all of your conventional and Roth IRAs cannot exceed $6,000 ($7,000 if you’re 50 or older), or your taxable salary for the year, whichever is less.
Income restrictions apply to IRA contributions, and future withdrawals will be subject to income taxes. However, since those withdrawals will be made when your income is likely to be lower, your total taxes paid will be lower.
3. Fund an HSA
If you have a high-deductible health plan (HDHP), you are likely to be eligible for a health savings account (HSA).The savings in an HSA may only be used for approved medical costs including doctor’s appointments, hospital visits, prescription prescriptions, and doctor-ordered lab tests.
Contributions to an HSA are tax-deductible, and withdrawals are tax-free. Because you retain the savings in your HSA for life, clever savers utilize it as a second retirement plan.
The IRS HSA limitations for 2022 will increase by $50 for individual coverage and $100 for family coverage, reaching $3,650 and $7,300, respectively. The catch-up contribution cap for those over 55 will remain $1,000.
4. Sell Sluggish Stocks
If your portfolio contains underperforming equities, you may sell them at a loss to reduce your capital gains for the year. Capital losses may be used to offset capital gains, but they cannot be used to reduce your taxes beyond that level. Any excess capital loss is carried over to the next year.
Always use caution when selling a stock. It is preferable to pay capital gains taxes and earn money rather than lose money. Don’t sell to avoid paying taxes. However, if you are going to sell anyhow, you might aim to plan your sale within a tax year that would be most advantageous.
5. Research Additional Deductions and Credits
There are thousands of tax deductions and credits available, but many Americans do not take advantage of them. While you are probably aware of the tax benefits for parents, there are extra education-related deductions and credits available. These are accessible for both children and courses taken at an approved college or institution.
If you incurred significant health-care expenditures in a single calendar year, you may be entitled to deduct those costs as well. To qualify for health care tax breaks, your healthcare expenditure must satisfy specific minimums and conditions that vary depending on your income.
The Bottom Line
We can’t avoid paying taxes, but careful preparation and comprehension may help you make your tax payment as low as possible. Plan ahead of time so you don’t have to rush at the end of the year or in the weeks running up to tax day.
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