As 2022 comes to a close, you may want to see if there are financial or investment steps you can take to reduce your tax burden either this year or in 2023.
Here are some issues you may want to consider and discuss with your tax professional and financial advisor.
Can you contribute more for retirement?
While the state of the economy might make you hesitant about setting additional income aside, consider whether you’re financially able to increase or maximize contributions to your workplace retirement plan.
At the very least, find out if you’re contributing enough to take full advantage of any employer match benefit, and consider increasing your pre-tax contributions to help lower your 2023 tax bill. Increasing contributions to a Traditional IRA is another option, although you should be mindful that those with higher incomes may not qualify for a tax deduction.
Should you consider a Roth conversion?
If you have some room in your current tax bracket before reaching a higher federal income tax rate, you may want to consider doing a Roth conversion. This will involve moving some or all of the money in your Traditional or Rollover IRA into a tax-free Roth IRA. You’ll have to pay taxes up front on the conversion amount, but you’ll never have to pay taxes on future earnings or distributions. And if your spouse or children inherit your Roth IRA, they’ll never have to pay taxes on withdrawals, either.
Could you benefit from tax-loss harvesting?
If some investments in your portfolio have suffered a loss, the end of the year is a common time to consider “harvesting losses” by selling them. Doing so can offset gains you have realized in your portfolio, and up to $3,000 of your earned income.
Keep in mind that when you sell an investment at a loss you must wait at least 30 days before repurchasing it. If you repurchase it before this timeframe the IRS will classify it as a “wash sale” and the loss won’t qualify.
Tax-loss harvesting can be challenging to do on your own. That’s why it’s one of the key activities investors rely on their financial advisors to conduct on their behalf.
Do your charitable donations qualify for a tax deduction?
Charitable contributions you make directly to a qualified charity may help you get a federal tax deduction. Keep in mind, however, that this will often only be beneficial if you itemize deductions and their total value exceeds the 2022 standard deduction of $25,900 for married couples filing jointly or $12,950 for single filers.
And, unfortunately, the maximum $300 per person charitable deduction for those who didn’t itemize in 2020 and 2021 is no longer available for 2022 tax-filers.
Do you need to think about RMDs?
If you’re turning 72 next year, you generally will need to start taking Required Minimum Distributions (RMDs) from your 401(k) and Traditional and Rollover IRA accounts, owing taxes on the way out. However, if you don’t need the income from your RMD to live on, you may be to delay taking your 2023 RMD until 2024, when you’ll have to take RMDs for both years. Your tax situation should be the key factor for determining whether to take or postpone your first RMD.
If you’re already taking RMDs but haven’t done it this year, it’s important to do it by year end. If you miss the deadline or don’t withdraw enough, you could be subject to costly IRS penalties.
A tax or financial advisor can help you calculate the aggregated RMD amount from all of your affected retirement accounts and recommend an appropriate withdrawal strategy.
Should you consider tax-advantaged charitable giving strategies?
While cash donations provide the easiest way to support charities, other charitable giving strategies may also deliver significant tax benefits.
If you have appreciated stocks, you may want to consider donating them to charity or use them to fund a donor-advised fund. Doing so may qualify you for a charitable deduction of up to 30% of your adjusted gross income. And you won’t be subject to capital gains taxes when the charity sells the donated stock.
And if you normally take annual RMDs from one or more Traditional IRAs, you may be able to offset their taxable impact by donating some or all of the RMD amount as Qualified Charitable Distributions (QCDs) to eligible nonprofit organizations. QCDs can lower or eliminate your taxable RMD amount, up to an aggregated maximum of $100,000 per year withdrawn from one or more IRAs.
Keep in mind that you can’t donate QCDs to a donor-advised fund.
Executing your own end-of-year tax plan
Although this end-of-year tax-planning planning checklist covers a lot of ground, it’s intended to serve as a springboard for your planning conversations with your tax professional or financial advisor. Some of these activities have end-of-year deadlines, so it’s better to have these conversations sooner than later so you’ll have enough time to take action.
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