Give Yourself A Gift Instead of Uncle Sam: Year-End Tax Tips
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As the end of the year approaches, time is running out to take advantage of opportunities to lower your 2022 tax bill. But there is still time to give yourself a present these holidays by decreasing your gift to Uncle Sam.
Whether you’re looking to reduce your taxable income or score some tax breaks, these tips from experts can help.
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Contribute To Your Retirement Accounts
One of the best year-end money moves you can make is contributing as much as possible to your 401k. Not only will this help lower your taxable income for the year, but it will also help you save for a more secure future and enjoy tax-deferred or tax-free earnings on your investments.
Greg Wilson, a Charted Financial Analyst, suggests ”Try to max out your 401k. Many experts suggest striving to contribute at least the amount that your company matches. But by doing that you are limiting the amount of money you can save on your taxes.” He admits, “it is difficult for many people to max out their 401k. But that is money you owe to your future self.”
Another year-end money move that can help you save on taxes is to open an IRA and contribute to it before the year ends. Depending on your income level, you may be eligible for a tax deduction on your contributions.
Realize Losses: Tax Loss Harvesting
Tax loss harvesting is a tax-saving strategy that involves selling investments at a loss to offset capital gains and lower your tax bill. If done correctly, tax loss harvesting can significantly lower your taxes owed each year. While tax loss harvesting can be used at any time, it is often most effective when done at the end of the year.
This is because you can use losses to offset gains from the previous year, which may help you avoid paying taxes on those gains. Additionally, tax loss harvesting can be used to offset other taxable income, such as interest and dividends. As a result, tax loss harvesting can be an effective way to lower your overall tax bill.
DadisFIRE shares a real-life example, “We sold a paid off rental house this year. To offset some of the capital gains we experienced, we have been actively harvesting losses all year. As our taxable portfolio drops in value, we instruct our financial advisor to sell securities and realize the losses. With the proceeds we then purchase similar securities.”
Defer Your Bonus
If your income is higher in 2022, defer your bonus to 2023. By doing this, your income will take place in a year where you may be eligible for more tax benefits.
Health Savings Accounts
While you can’t exactly plan for medical emergencies, you can plan to take full advantage of your healthcare spending accounts before year-end.
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Andrew Herrig, MS in Economics and founder of personal finance site WealthyNickel recommends funding your healthcare accounts. He says, “If you haven’t maxed out your health spending account (HSA), be sure to put as much money in as possible to reduce your taxes and save for future medical expenses. And if you have a flexible spending account (FSA), make a plan to use it or lose it by year end.”
Contribute To A 529 Plan
529 investment accounts offer tax-free growth and tax-free withdrawals for qualified education expenses. 529 Plans are sponsored by states and colleges and are managed by financial institutions. 529 Plans offer two significant tax benefits: tax-free growth and tax-free withdrawals.
Brett Green, PhD, offers this example, “Most states provide tax incentives for contributions to a 529 plan. For example, Missouri offers a tax deduction of up to $8,000 per year ($16,000 for married, joint filers) for contributions to a 529. That means a married couple can save over $800 in taxes while saving for their children’s education.” Brett is a Professor and Financial Economist at Washington University in St. Louis.
Plans are especially beneficial for year-end savers because they offer an immediate federal tax deduction for contributions made before the end of the year. 529 Plans are also good for state taxes in many states. For these reasons, 529 Plans are one of the best ways to simultaneously lower your taxes and save for college.
‘Maximize Your bracket’ With A Partial Roth Conversion
Drops in investment value are never fun, but there are silver linings when bear markets occur and Roth Conversions might be one of those bright spots for certain investors.
With a significant drop in market value, now may be the time to take advantage of moving Traditional IRA/401k dollars into a Roth IRA. The lower market values mean potential tax savings. Investors considering this strategy in the past may want a fresh look.
Brian Hoeltge, CFA, Wealth Advisor with RubinBrown Advisors offers the following example. “At the market peak, an investor has $1,000,000 of qualified money and wishes to convert 10% of the portfolio into Roth IRA dollars. She is married and files jointly and is in the 24% tax bracket. At market peak, her conversion results in $24,000 of taxes to be potentially paid. If she converts instead when her portfolio is down 20%, she only owes $19,200 in taxes, for a savings of nearly $5000 in taxes. If the market rebounds, she recognizes that appreciation in a now tax-free account.”
Be careful though. Potential consequences of Roth conversions can impact how much of your Social Security is taxable and/or how much you pay in Medicare premiums (depending on investor’s age).
Help Yourself, While Helping Others
Mark Patrick, MS in Economics and Finance, and founder of Financial Pilgrimage, says, “End of year is a great time to consider helping others in need. Giving money away may not seem like the best money move on the surface. However, giving may increase happiness, reduce stress, and improve your community. If you itemize deductions on your tax return, charitable contributions can also reduce your tax burden. There are many good reasons to support important causes with a monetary donation, especially during the holidays.”
Make a Contribution to a Donor Advised Fund
A donor-advised fund (DAF) is a special type of charitable account that allows donors to make a charitable donation and receive an immediate tax deduction. Donor-advised funds offer several benefits for both donors and charities.
First, donor-advised funds offer an immediate tax deduction. This means that donors can take a deduction in the year they donate, even if they don’t decide which charity to give the money to until later.
Second, donor-advised funds are exempt from capital gains taxes. This means that donors can avoid paying taxes on any appreciation in the value of their investments. Finally, donor-advised funds can be used to automate charitable giving.
By taking advantage of these benefits, donors can maximize their charitable giving while minimizing their taxes.
Lower Your Taxes
Whether it’s taking advantage of year-end bonuses or shifting pre-tax contributions to your workplace benefits, many year-end money moves can help you save on taxes and improve your financial situation heading into 2023
If you are looking for additional ways to save on your taxes before the year ends, be sure to consult with a tax professional who can help you identify the strategies that are most appropriate for your individual situation. With the right year-end money moves, you can lower your tax bill and keep more of what you earn at the end of the year.
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Greg is a Chartered Financial Analyst (CFA) with 22+ years experience in Financial Services. He has held numerous FINRA Securities licenses (series 7, 63, 65, and 66), and is an expert on Investment Products and Financial Planning. Greg has 22+ years experience as a real estate investor and degrees in Psychology and Philosophy.
Greg has been quoted/interviewed in Yahoo Money, Yahoo Finance, USA Today, Authority Magazine, Realtor.com, Business Insider, and others.
Greg is an avid runner, and the father to identical twin girls and their awesome brother. His love of budgeting and his kids led him to join The Great Resignation in 2021.
Disclaimer: Any Financial Tips on ChaChingQueen are general and informational. Speak with a professional about your specific situation.