Ways to Save at Tax Time

The end of the year is a time when our to-do lists can overflow and it can feel like there’s not enough hours in the day. However, as busy as you may find yourself, this is an ideal time to make some strategic financial decisions that can benefit you when tax time arrives.

Here are 10 Year-End Tax Planning Tips:

  1. Tax-Loss Harvesting. Investors can use tax-loss harvesting, also known as tax-loss selling, for significant savings.  By selling an investment that shows a loss in value, you can offset capital gains taxes that are due on profits from other investments.  Your realized losses first offset realized gains, then you can claim up to $3,000 of capital loss and carry additional loss forward into following years. However, it is key to follow IRS regulations and avoid a “wash sale.” To benefit from tax-loss harvesting, you cannot sell or trade a security at a loss, and within 30 days before or after buy the same or substantially identical security. That would be considered a “wash sale” and would prevent you from being able to use that loss to reduce tax liability.
  2. Do a tax projection and figure out if you owe money. Work with your tax preparer to determine if your withholding and tax payments are on target for this year. The IRS also has a tax withholding estimator that can help you determine if making adjustments to the amount of money you have withheld from your paycheck might help you to avoid owing a large tax bill in April. If necessary, you can file a new W-4 with your employer or pay estimated tax payments.  Fourth Quarter estimates have a due date of January 17, 2023.
  3. Determine if you are taking the standard deduction or itemizing.  The standard deduction for married couples filing jointly for tax year 2022 is $25,900. For single taxpayers and married individuals filing separately, the standard deduction is $12,950. For heads of households, the standard deduction is $19,400.  If you are blind or over age 65, the additional standard deduction amount is $1,400.  If you are itemizing, consider prepaying some of your itemized deductions in 2022, such as charity and medical expenses. You can work with your tax preparer to determine the best tax strategy for you.
  4. Consider Roth IRA Contributions. Retirement savers may be eligible for Roth IRA contributions if you have earned income and your income is below certain limits. The threshold amounts for opening a Roth IRA in 2022 are a modified adjusted gross income under $214,000 for those who are married and filing jointly, or $144,000 for single or head of household filers. With a traditional retirement account, you’ll pay taxes on withdrawals, but contributions and earnings in a Roth IRA grow tax-free, and can be withdrawn tax-free after the age 59 ½ so long as the account has been open for at least five years. This may benefit those who estimate that they might be in a higher tax bracket in the future. Additionally, with a Roth IRA, you can withdraw your contributions tax-free at any time.  The contribution limit in 2022 is $6,000 (plus $1,000 if you are aged 50 or over). For 2022, you have until April 18, 2023, if you are contributing to a traditional IRA or Roth IRA.
  5. Consider a Roth Conversion.  Consider converting some of your traditional IRA to a Roth IRA.  The amount converted is subject to tax for the year of conversion, however there are no income limits for conversions.  A conversion can be especially beneficial when investment markets are down, as converted assets have a depressed value which should then appreciate in a tax-free Roth IRA account. Roth conversions are also beneficial if you are in a low tax bracket.
  6. Contribute to retirement plans. For those who build their retirement savings in a 401(k) or 403(b) through an employer and have contributions made through payroll deductions, your account administrator can help you review your balances and determine if you are on track to max out your eligible limits for the year. You can contribute up to $20,500 to a 401(k) or 403(b) in 2022. For those age 50 or over, you can add an additional $6,500 in catch-up contributions. Consider increasing contributions if your situation allows.
  7. 529 Contributions. A 529 plan is a tax-advantaged savings plan designed to encourage saving for future education costs. 529 plans allow for tax-free growth and tax-exempt withdrawals as long as the funds are used to pay for qualified educational expenses. While contributing to a 529 plan before the year is over won’t reduce your federal taxes, it may lower your state taxes. Certain states, including New York, offer an income tax deduction up to a set dollar amount for contributions made to their 529 plan in a given year.
  8. Annual gifting. If you gift money or securities to someone else, you may be subject to paying a gift tax or reducing your lifetime gifting amount. The annual exclusion had been $15,000 in 2018-2021, is $16,000 in 2022 and is increasing to $17,000 in 2023, per gift recipient. You could gift several gifts to different people, and provided they are under $16,000 each this year, will not be subject to gift tax filing. Married couples can therefore gift $32,000 in 2022 to each recipient.
  9. Charitable Giving with Appreciated Stock. Consider leveraging your charitable giving by donating long-term appreciated securities directly to charity, instead of gifting cash.  The benefit of gifting securities is that generally you can take a tax deduction for the full fair market value of the securities, instead of selling the securities and gifting the after-tax proceeds.  As an alternative to gifting directly to the charity, you could set up a donor-advised fund which is like your personal charitable investment account that you can then use to support the qualified charities of your choice.
  10. Charitable Giving from your IRA (QCDs). For those who are 70 ½ and over, consider making qualified charitable distributions (QCDs) from your eligible IRAs. Provided that certain rules are met, direct transfer of funds from your IRA to a qualified charity can count toward satisfying your required minimum distributions (RMDs) for the year, if you are over 72, while keeping your taxable income lower.

There are many ways to save money on taxes, but each filer has their own unique financial circumstances. For tax strategies that are best suited to your needs, speak to your accountant or financial advisor. If you would like more information, please contact us.