5 common ways to lower your taxable income in 2022
1. Enroll in an employee stock purchasing program
If you work for a publicly traded company, you may be eligible to enroll in an Employee Stock Purchase Plan (ESPP). By enrolling in your ESPP, you will divert after-tax dollars from your paycheck with the intent of purchasing shares of your company, and in many cases, you will be offered a discount (typically around 15%) on the stock price that is only available to employees.
You can choose how much after-tax dollars you want to contribute to your ESPP, which usually ranges between 1% to 10%. Keep in mind, however, the 2022 maximum contribution limit is $25,000 total per year.
The tax advantage of enrolling in an ESPP comes into play when you decide to sell your shares. While employees can choose to sell their shares immediately after purchase or at a later date, they’re rewarded for holding onto their shares for at least one year from the purchase date. Selling immediately means you pay ordinary income tax, while selling later means you pay a lower long-term capital gains tax — therefore reducing your tax burden.
While it can be a good idea to take advantage of purchasing your employer’s stock at a discount, while also benefitting from holding your shares over the long term, make sure 1) you have enough cash to contribute and 2) the investment fits into your overall financial plan. Certain financial goals, such as paying off high-interest debt, saving up an emergency fund and contributing to an IRA or 401(k) — and meeting any employer match — should first be met before participating in a stock plan.
