5 Easy Tax Deductions to Lower Your Tax Liability Before the End of the Year
Tax time is almost upon us again, meaning it’s time to look at your finances and see where you can intentionally spend money before the year ends to lower your taxes come April 15th.
It might sound crazy to spend money to lower your taxes, but it’s a great strategy for business owners. Here are five simple ways you can reduce your tax liability this year.
1. Fund a Health Savings Account
If you haven’t set up a Health Savings Account (HSA) or you have one and haven’t funded it yet this year, consider it before the year ends. If you have a qualifying insurance policy with a high deductible, you may be eligible to contribute up to $3,650 in an HSA for single filers or $7,300 for a family. If you’re over 55, you can contribute an additional $1,000.
You can deduct the funds you contribute, and your money grows tax-free. In addition, if you use the funds for eligible medical expenses, you won’t pay any taxes on the funds when you withdraw them.
2. Purchase Business Equipment
If you’ve been thinking about buying new equipment or a business vehicle, do it before the year ends. Then, you might be eligible to deduct the full amount on your tax returns rather than depreciating it over time. This is the case if you can prove you use the equipment more than 51% of the time in your business.
If you aren’t sure whether your business equipment purchase will count, contact us to discuss your purchase to determine if it’s eligible.
3. Pay Employee Bonuses
If you normally pay employee bonuses at the start of the year, consider paying them before the year ends to get the deduction. You’ll get the deduction this year and immediately lower your tax liabilities. This gives you an entire year to discover ways to lower your liabilities for next year too.
4. Prepay Expenses
If you know you use a certain amount of supplies each month or have set expenses you budget for, consider paying them upfront before the year ends. The large expense will reduce your annual income and lower your tax liability.
Of course, this only works if you have the money to pay the expenses upfront, but you get the deduction at tax time.
5. Accept Capital Losses
If you have stocks whose values have decreased since you purchased them, consider selling them at a loss. If your capital losses are greater than your capital gains, you may deduct up to $3,000 in losses from your business income, aka ordinary income.
Now is the perfect time to check up on how to spend money before the year ends. With intentional spending, you can reduce your tax liabilities and keep more money in your pocket.
If you aren’t sure where to spend your money or how it might affect your taxes, contact Murtha and Murtha CPAs today for a consultation. We’ll help you understand the best way to spend your money so you realize the tax benefits of the intentional spending.
December 1, 2022 @ 16:13
Both my wife and I are well into our 70s, on Medicare and are taking mandatory IRA distributions. Does it make sense for us to fund an HSA?
December 1, 2022 @ 16:30
Hi David, thank you for your question. In order to be eligible to contribute to an HSA, you must be enrolled in a health plan that is considered a High Deductible Health Plan (HDHP). If you and your wife are on Medicare, then you will not qualify. If you are ineligible for Medicare and have a HDHP, then yes, you can contribute to an HSA.
If you are eligible, HSAs are excellent tax savings tools because you receive a tax deduction for contributions. If you pay eligible medical expenses using the account, you do not need to pay tax on those distributions.