As the year draws to a close, it’s understandable that things can get busy, but it’s also a critical time for your family to put in place several important tax-saving strategies. Acting now can substantially lower your tax liability come April, but with only a few weeks left in 2022, time is of the essence.
While numerous tax breaks may be available to you, here are four prominent actions you can take to make significant savings on your 2022 tax return. Keep in mind that there could be additional opportunities for tax savings as well.
01 – Maximize retirement account contributions
By maximizing your contributions to tax-deferred retirement accounts, such as IRAs and 401(k)s, you can not only save for retirement, but also reduce your taxable income for 2022.
In 2022, you can contribute up to $6,000 to an IRA and up to $20,500 to a 401(k) if you’re under 50, and up to $7,000 to an IRA and $27,000 to a 401(k) for those 50 and older. If you don’t have the cash available to fund the maximum amount, try to contribute at least any amount that will be matched by your employer, since that’s basically free money, and you lose it if you don’t use it.
That said, the ability to deduct your traditional IRA contributions from your taxes comes with certain limitations. These limitations are based on factors, such as whether or not you or your spouse is covered by a retirement plan at work and your adjusted gross income (AGI), so make sure you know how your family is affected by these limits when taking deductions. On the other hand, Roth IRA contributions are not tax deductible, since they are made after taxes are taken out, but withdrawals from a Roth in retirement are tax-free.
Additionally, consider maxing out contributions to your Health Savings Account (HSA). Contributions to HSAs for 2022 are capped at $3,650 for individuals and $7,300 for families, with an additional catch-up contribution of $1,000 allowed for those age 55 and older.
You have until December 31, 2022 to contribute to a 401(k) plan and until April 18, 2023 to contribute to an IRA or HSA for the 2022 tax year.
02 – Defer income if you’ll make less next year
If you’re expecting to make significantly more income this year than in 2023, try to defer as much income into next year as possible. However, this strategy only makes sense if you’ll be in the same or a lower tax bracket next year.
This might mean asking your boss to delay paying a year-end bonus until after Jan. 1, 2023, or if you’re self-employed, waiting to invoice certain clients until the new year. On the other hand, if you think you’ll be in a higher tax bracket in 2023, you may want to do the opposite and accelerate income into 2022 to take advantage of a lower tax bracket.
03 – Use “loss harvesting” to offset capital gains
With both the stock and crypto markets experiencing declines this year, now may be an opportune moment to consider employing a strategy known as “loss harvesting.” This approach involves selling taxable investment assets, such as stocks, mutual funds, and bonds, at a loss to offset any capital gains you may have realized earlier in the year. Capital losses have the potential to offset capital gains on a dollar-for-dollar basis.
If your losses surpass your gains, you can deduct up to $3,000 of combined losses against other income. Any excess losses beyond $3,000 can be carried over into the following year, and this carryover provision extends throughout your lifetime.
It’s important to note that loss harvesting is not applicable to tax-advantaged accounts like 401(k)s, IRAs, and 529 plans. Furthermore, the IRS enforces a “wash-sale” rule, which prohibits claiming a tax write-off for purchasing a “substantially identical” asset within a 30-day period before or after the sale that resulted in the loss.
Due to these complexities and limitations, it’s advisable to seek guidance from your CPA or financial advisor before implementing a loss harvesting strategy to ensure it aligns with your financial goals and doesn’t have unintended consequences. Additionally, if you’re interested in coordinating your legal, insurance, financial, and tax affairs, we offer support services that can facilitate collaboration between you, your CPA, and financial advisor. Feel free to inquire about this service to help streamline your financial planning before the year ends.
04 – Watch your required minimum distributions (RMDs)—or ensure your parents are watching theirs—if you or they are over age 72
If you have an employer-sponsored retirement plan, including a 401(k), 403(b), traditional IRA, SEP IRA, or SIMPLE IRA, you must start taking required minimum distributions (RMDs) by April 1st of the year that follows the year you turn 72. After that, annual withdrawals must be made by December 31st each year to avoid a serious penalty.
If you fail to take the proper RMD, you may face a 50% excise tax on the amount you should have withdrawn based on your age, life expectancy, and your account balance at the beginning of the year. That said, if you do make a mistake, you may be able to avoid the penalty by requesting a waiver from the IRS. You can request a waiver if your failure to take the RMD is due to a reasonable error, and you take steps to make the required distribution. To request a waiver, submit Form 5329 to the IRS, with a statement explaining the error and the steps you are taking to correct it.
Note that in 2022 the IRS updated its uniform lifetime table to calculate RMDs to account for longer life expectancies. As a result, your RMDs for this year may be slightly lower compared to previous years. To determine your RMD, refer to the IRS RMD worksheet, or use an RMD calculator.
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