Before the End of the Year, Consider These 5 Tax Moves
When it comes time to file taxes, careful tax planning may result in fewer unpleasant surprises. Here are some suggestions to think about before end of the year.
Taxes could be the last thing on your mind as the holidays get near. However, a little amount of planning now could have a significant impact come April.
Here are five things to watch as the year comes to a close.
1. If You Can, Increase Your 401(K) Contributions.
You can save for retirement and receive tax benefits by contributing to an employer-sponsored retirement plan, such as a 401(k). Since contributions are frequently made before taxes, they may lower your annual taxable income.
How much you can afford and how long you have before retirement will affect your contribution. Taxpayers can make 401(k) contributions of up to $20,500 until end of the year. And those who are 50 or older are eligible for a catch-up contribution of up to $27,000.
Also frequently, employers will match a percentage of your contributions. The average guaranteed employee match in 2021 was 4.4% of pay.
However, if you merely make the minimum contribution required to receive the match, you risk losing some money. Why? Since you can reduce your taxable income for the year by a greater amount the earlier you contribute by December 31, the better.
2. If You Just Started Working by Yourself, Consider a Solo 401 (K)
Opening a solo 401(k), a retirement savings plan for a person who is a business owner without employees, may not have been at the top of your list this year. Even if you’re a freelancer or otherwise self-employed. But forming a plan has several advantages, one of which is that your contributions can reduce your taxable income.
While you only have until December 31 to start the account, we advise that you have until the April 18, 2023 tax filing deadline to make contributions to the account that will be eligible for end of the year deduction.
3. Consider the Losses on Your Investments
A tax-loss harvesting method, which can help you make a little lemonade out of the lemons in your portfolio, may be especially beneficial in 2022. Especially if you’re an investor who has been grimacing while watching the stock market experience adverse swings.
How it works: Investors who sell securities at a loss can often deduct that loss from any realized capital gains. Additionally, if their losses outweigh their gains, they can even carry over any unused losses to future tax years and offset up to $3,000 of regular income.
Only assets sold in taxable accounts, such as brokerages, are eligible for tax-loss harvesting. Investments made in tax-advantaged accounts, such as 401(k)s or IRAs, cannot be used with the method. Working with a tax or financial counselor is also worthwhile since a professional can make sure this plan is the best one for you and keep you in compliance with IRS guidelines, which can be complex.
4. Take Into Account Saving Money
To prevent a surprise tax bill, it is hoped that you had adequate tax withheld during the year. Your overall wages, however, may be inflated by a few factors, like bonuses or freelancing employment.
If you are a self-employed person who invoices clients on a project-by-project basis, you might want to postpone billing if you believe that additional money will increase your 2022 earnings.
It’s quite likely that you won’t receive the income until the next tax year if you bill for your services in the third or fourth week of December. By making this decision, you may be able to plan for 2023 and limit your taxable income for 2022.
You might ask your company to hold off on giving out your bonus until January. Especially if you’re anticipating one and believe your income will be lower in the next year. Consider it carefully. Not everyone will benefit from this end of the year move. You’re not completely avoiding taxes; you’re only delaying them until 2023.
5. Consider Converting to a Roth IRA.
You can convert your conventional IRA assets into a Roth IRA to receive tax-free status for future investment growth and eligible withdrawals. One drawback is that you’ll probably have to pay taxes on the money converted.
If the value of your account has decreased, you are converting less money, which could result in lesser taxes owed. This is where a down market can be helpful.
But keep in mind a few negatives. You can be placed in a higher tax category as a result of the move in addition to the conversion taxes. Additionally, an inflated income may affect several other factors, such as your overall tax liability. Retirement status or impending retirement may also have an impact on the amount of Social Security that is subject to taxation as well as the cost of some Medicare premiums.