End of Year Tax Considerations

As we enter into the holiday season, tax planning is usually the last thing on people’s minds.  However, in the weeks leading up to Christmas, there are some little things you can do to maximize your planning and potentially decrease your tax liability.

  1. Max out Employer Sponsored Retirement Plans.  401(k), 403(b) and TSP accounts (among others) share many similarities to Individual Retirement Accounts- IRAs.  There are many differences though, a key one being that contributions can only be made by salary deferral during the calendar year.  In 2022, the maximum employee contribution is $20,500. If you are still below this limit and would like to contribute more, make sure to increase your contributions quickly. 
  2. Consider a Roth Conversion.  This is a long term move that transfers a Traditional IRA balance to a Roth IRA either all or in part.  There is no penalty on this conversion, but ordinary income tax will be due as traditional IRAs are pre-tax accounts. Since 2022 has been a down market year, it can be advantageous to look at a conversion. A couple considerations are your tax bracket from ordinary income and if you within two years of beginning Medicare.
  3. Tax Loss Harvest.  This is a strategy that involves selling investments currently at a loss.  Once sold, you can replace it with an investment with similar properties.  You receive the full tax loss that can be counted against investment income for this year without ever divesting from the market.  The loss can offset all investment income and $3,000 of additional loss can go to offset ordinary income.  Any losses above the $3,000 can be carried over and used in subsequent years. A deliberate and well executed tax loss harvest could keep your money working, but lower tax liabilities for years to come.
  4. Monitor your FSA and HSA balances.  These accounts can both be used for healthcare expenses, but act very differently.  FSA money must be used up by March of the following year or it is lost forever.  The FSA contribution was pretax, but it is still prudent to ensure anything contributed the account is spent on doctors or dentist visits, health club memberships, prescriptions, supplements etc, so it is not lost.  HSA contributions are also tax deductible, but this balance can grow in perpetuity and even be invested. At some point we will do a write up in the benefit of these amazing accounts, but for year end planning purposes, it is simply important to max out contributions. $3,650 for individuals and $7,300 for families.
  5. Last is to bundle deductions.  Charitable Giving, property taxes, education and healthcare expenditures are all expenses that are potentially deductible in the year they are incurred. Depending on your situation, writing a check that with a due date in Jan a month early could add a small amount of savings on your tax bill. This is all under the assumption that you are an itemized filer. If you have questions, it is prudent to connect with your tax advisor and financial planner to determine if these are applicable.

Most financial plans are built around parts of these happening regularly on their own. However, if taxes are a concern in the upcoming year, a few small checks can yield tax savings overall.

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