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End-of-the-Year Tax Strategy Review

End-of-the-Year Tax Strategy Review

December 13, 2022

While 2022 may be a year most want to forget, with all the market fluctuations, inflation, and interest rate hikes, it’s still vital to take a final look back and get your finances wrapped up before you ring in the New Year. 

Here are 10 tax strategy tips to keep in mind to finish 2022 strong and start 2023 the right way. 

Harvest Your Tax Losses

The IRS allows investors to offset their capital gains with similar capital losses. If you happen to be holding a losing investment, now might be a good time to sell it so that you can use the loss to offset your capital gains for this year and therefore lower this year’s tax bill.

Give to Charities

Contributing to charity can lower your tax bill if you itemize your deductions. And it doesn’t have to be just money that you donate. Clean out your closet and kitchen cabinets and take a box over to your local 501(c)(3) thrift store. As long as they give you a receipt for the donation, you will be able to itemize and deduct whatever the fair market value is for the items.

If you have appreciated stock, you can get an even greater benefit by donating it to charity. You get to deduct the fair market value of the stock as a charitable contribution and the charity is not liable for the capital gains. 

Open a Donor-Advised Fund

With the new, higher standard deduction created by the Tax Cuts and Jobs Act, many of those who are charitably inclined are considering donor-advised funds. Donor-advised funds work as charitable giving savings accounts where you get a deduction when you put the money into the fund, not when you distribute it to a charity. 

Take Your Required Minimum Distribution

If you are 72 or older, then you are required to take minimum distributions from your retirement accounts (except Roth IRAs). In the year that you turn 72, you have until April 1 of the following year. After that, the money must come out of your account by December 31. 

Max Out Your Retirement Account

Another way to lower your income, and therefore your tax bill, is by deferring that income until retirement. In 2022, you can contribute up to $20,500 to a 401(k) plan, which will remove that money from your current taxable income. If you are 50 or older, your yearly contribution limit goes up to $27,000. You can put up to $6,000 in any type of IRA; $7,000 if you are over age 50.

Convert Your IRA

If you have lower income than normal in 2022, then it might make sense to convert your traditional IRA to a Roth. In doing so, you would pay the income taxes on the money now, at your 2022 rates, so that you could take all withdrawals tax-free in retirement.

Another benefit of having your money in a Roth account is that it is not subject to required minimum distributions as discussed above. Once your money is in a Roth IRA, you can leave it in there to grow as long as you’d like.

Keep in mind that Biden’s Build Back Better tax plan, currently waiting for Senate approval, includes major changes for backdoor Roths and Roth conversions. By 2032, backdoor Roths will no longer be available. This applies to single filers making more than $400,000 and married couples making more than $450,000. It also prohibits any after-tax qualified retirement accounts (like 401(k)s) from being converted to a Roth IRA, regardless of income level, starting in 2022. If you were planning to take advantage of the backdoor Roth strategy, now is the time to talk to your financial professional about whether this is the right strategy for you.

Take Advantage of Your HSA

If you have access to a health savings account (HSA) with your high-deductible health plan, you can enjoy triple-tax savings with no federal income tax, no state or local taxes, and no Federal Insurance Contribution Act (FICA) taxes. Your contributions are tax-deferred and withdrawals are tax-free for medical expenses. 

Since your balances roll over from year to year, you can max out the account without worrying about using it up right away. For 2022, the contribution limit is $3,650 for an individual and $7,300 for a family, with a $1,000 catch-up bonus for those over 55.

Prepay Tuition

If you have a college student, consider paying next term’s tuition before December 31. Any tuition you pay for the first four years of undergraduate study is eligible for the American Opportunity Tax Credit. This can save you up to $2,500 per student on your tax bill depending on your expenses and income. If you are the one doing the studying, you may be eligible for the Lifelong Learning Credit.

Contribute to a 529 Plan

If you’re still working on saving for your children’s college education, then you may benefit from putting some money into a 529 plan before the year’s end. This won’t help with your federal tax bill, but it might lower your state taxes. Many states allow deductions for contributions to the state’s 529 plan and some even allow them for contributions to other plans. 

Reach Out for Help!

At 1on1 Financial, we specialize in guiding working and retired professionals, executives, and business owners along the path to financial well-being. Our success is built upon developing lasting, meaningful relationships based on trust, integrity, and superior service. Let’s start the conversation today; call our office today at 909-981-1720 or simply click here to schedule a free 15-minute introductory phone call!

About 1on1 Financial

1on1 Financial is an independent financial advisory firm specializing in guiding working and retired professionals, executives, and business owners along the path to financial well-being. Founded in 1997, we use a team approach to help our clients accumulate wealth, generate income, preserve their life savings, and strategically plan for the distribution of their estate. With more than 50 years of combined experience in the financial services industry, we remain true to our fundamental mission: to provide personalized guidance, treatment, care, and service so our clients can gain control of their future and feel confident in their financial life.