With another year end on the horizon, there are still a few more critical months to make some money moves and consider integrating tax planning into your overall financial strategy!
Keep in mind that your overall goals and objectives should drive your financial plan first and foremost, with income tax strategies layered on top of that, and your total tax picture should be assessed before implementing any strategy. Here are some of the top tax items to consider before the end of the year:
Offset capital gains and losses
Given the volatility of the market this year, you may find that your portfolio has some unrealized losses sitting in it. If you have capital gains for the year (perhaps from the sale of real estate investment property, for example), you may consider offsetting these gains by harvesting losses. This strategy also works the other way around by purposefully harvesting gains to offset realized losses. Be careful with harvesting losses, as it may not always be favorable, particularly if you are in the 0% capital gains tax rate bracket. Also watch out for the IRS wash sale rules, which disallow losses if substantially similar securities are purchased 30 days before or after the sale.
Check your Health Savings Account (HSA) or Flexible Spending Account (FSA)
Now is a great time to check year-to-date contributions to your HSA. The maximum for 2022 is $3,650 for self-only and $7,300 for a family plan (plus an additional $1k if you are over 55). If you still have room to maximize your contributions (yay, higher tax deduction!), you have until the tax filing deadline (April 18, 2023) to make contributions for the 2022 tax year.
If you have a medical FSA, check the balance in your account and make sure you are familiar with the rules of your plan. Most FSAs are subject to the “use it or lose it” rule, where you will forfeit all or most of your contributions if you don’t use them by year end. This is also a good time to note if you should elect to increase ($2,850 was max for 2022) or decrease your contributions for 2023, depending on how much you’ve utilized during the year.
Assess Required Minimum Distributions (RMDs)
Be aware of RMDs that you may need to take from your IRA, 401(k) or other qualified retirement plan by December 31st to avoid tax penalties. If you turned 72 this year (and are not still working), you have until April 1, 2023, to take your first RMD, but if you defer to 2023, you must take two RMDs in 2023. Also understand the RMD rules if you have an inherited IRA (or other qualified plan), which vary depending on when it was inherited and what type of beneficiary you are.
Maximize charitable giving
Don’t overlook the tax benefits associated with being philanthropic! To get the most bang for your buck, consider donating appreciated stocks in lieu of cash to receive an itemized tax deduction for the fair market value of the stock (up to 30% of your Adjusted Gross Income) AND avoid capital gains tax on the appreciation.
If you are at least 70 ½, you may also make Qualified Charitable Distributions (QCDs), up to $100k, directly from your qualified retirement plan, so that the donation is essentially made on a “pre-tax” basis. QCDs also count towards your RMD (so long as you haven’t already taken them for the year), thereby reducing your overall taxable income. Be sure to let your tax preparer know that you made a QCD.
Lastly, if you are on the cusp of itemizing deductions vs. taking the standard deduction, you may consider “bunching” itemized deductions, such as your charitable donations. This is a multi-year strategy, which involves offsetting years that you are making donations (e.g., every other year) to maximize total tax savings.
Coordinate withholdings and estimated tax payments
Do you have an idea of how much your tax bill will be for 2022? If you have no clue and/or your situation has changed significantly from the prior year (started a business, retired, sold assets, started Social Security, etc.), now is a good time to do some tax planning to understand what your projected tax liability might look like so you can either adjust your withholdings or Q4 estimated tax payment to try to avoid a major surprise come next April.
Other items to consider:
- Maximize retirement plan contributions
- $20,500 max deferrals ($27k if over age 50) to employer-sponsored plans must be made by December 31st
- $6k max IRA contributions ($7k if over age 50) may be made until April 18, 2023
- Establish a Solo 401(k) and elect to make employee deferrals by December 31st
- Gift up to $16k per person to remain under the annual gift tax exclusion
- Roth considerations – conversions and backdoor/mega backdoor contributions
- Deferring income (e.g., if you are expecting a large year end bonus, you may be able to defer receipt to 2023) or accelerating expenses
Please note that this is not meant to be considered as tax advice, and you should consult your CPA for further details.
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Dollar cost averaging involves continuous investment in securities regardless of fluctuation in price levels of such securities. An investor should consider their ability to continue purchasing through fluctuating price levels. Such a plan does not assure a profit and does not protect against loss in declining markets.
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