Question: My husband and I have been enjoying earning more over the years in our careers. However, our tax bill has also been going up. What can we do to avoid paying so much in taxes?
Signed, Overtaxed Mama
Hi Overtaxed Mama,
I so hear you! As we grow into our careers, so do our incomes over time. If we add to this being in relationships and counting our partners’ income jointly, chances are our earnings can grow even more as the years pass. However, with our incomes, also grows another less fun side-effect, that is the taxes we end up owing on our tax returns. After all, doesn’t the popular saying confirm only two things are certain, death and taxes?
Related: The She-Tax: How Tax Policy Is Fueling Gender Bias
As you may have watched your earnings grow, you may also have watched your tax bill get larger as you file taxes. Since you’re taxed on your raising income, it’s hard to avoid. However, there are ways to offset the tax increase that comes with earnings growth. I’ve grouped these in 3 categories, that you may remember under the mnemonic RED:
- R is for the Retirement savings you should maximize:
One of the most effective ways to reduce your taxable income is to increase your retirement savings. You can do this by maximizing your contributions to your 401k employer-sponsored plan, up to $20,500 in 2022. Individuals 50 and olderSince these contributions are made before before tax, they directly reduce your income.
You can also contribute to an Individual Retirement Account (IRA), up to $6,000 annually ($7,000 for 50 and older).
Related: Should I report my side hustle income as part of my income taxes?
- E is for Expenses with Flexibility:
Another way to reduce your taxable income is to use flexible spending plans, offered by some employers. One of these is the Flexible Spending account (FSA), in which employees can contribute and set aside funds up to $2,850 in 2022 for medical expenses.
Similar to the FSA, the Health Savings account (HSA) is dedicated to employees with high-deductible health insurance plans, whose pre-tax contributions go toward healthcare costs.
Related: What work expenses can I deduct on my tax return?
- D is for Business Deductions:
Lastly, yet another way to bring your taxable income down is to deduct business-related expenses such as the home office deduction for instance. Other available business deductions include health insurance costs, as well as other deductible expenses.
These are all effective ways to reduce your taxable income, especially as it increases over time. Consider using one or a combination of these to lower your tax burden.
Related: Ask a CPA: What tax deductions should I consider if I’m self-employed?
Got a CPA-related question? Email us at corporate@thecorporatesister.com.
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