It's time for 2022 year-end tax planning! Here are some things to consider as you weigh potential tax moves between now and year-end.
Defer income to 2023
Consider opportunities to defer income to 2023, particularly if you think you may be in a lower tax bracket then.
For example, you may be able to defer a year-end bonus or delay the collection of business debts, rents, and payments for services. Doing so may enable you to postpone payment of tax on the income until next year.
Accelerate deductions into 2022
You might also look for opportunities to accelerate deductions into 2022.
If you itemize deductions, making payments for deductible expenses such as medical expenses, qualifying interest, and state taxes before the end of the year (instead of paying them in early 2023) could make a difference on your 2022 return.
Make deductible charitable contributions before year-end
If you itemize deductions on your federal income tax return, you can generally deduct charitable contributions, but the deduction is limited to 50% (currently increased to 60% for cash contributions to public charities), 30%, or 20% of your adjusted gross income (AGI), depending on the type of property you give and the type of organization to which you contribute.
Excess charitable contributions can be carried over for up to five years
Bump up withholding before year-end to cover a tax shortfall
If it looks as though you will owe federal income tax for 2022, consider increasing your withholding on Form W-4 for the remainder of 2022 to cover the shortfall.
Time may be limited for employees to request a Form W-4 change and for their employers to implement before year-end
The biggest advantage in doing so is that withholding is considered as having been paid evenly throughout 2022 instead of when the dollars are actually taken from your paycheck.
This strategy can be used to make up for low or missing quarterly estimated tax payments
Save more for retirement
Deductible contributions to a traditional IRA and pre-tax contributions to an employer-sponsored retirement plan such as a 401(k) can reduce your 2022 taxable income. If you haven't already contributed up to the maximum amount allowed, consider doing so.
For 2022, you can contribute up to $20,500 to a 401(k) plan ($27,000 if you're age 50 or older) and up to $6,000 to traditional and Roth IRAs combined ($7,000 if you're age 50 or older)
The window to make 2022 contributions to an employer plan generally closes at year-end, while you have until April 18, 2023, to make 2022 IRA contributions.
Roth contributions are not deductible, but Roth qualified distributions are not taxable
Take required minimum distributions before year-end
If you are age 72 or older, you generally must take required minimum distributions (RMDs) from traditional IRAs and employer-sponsored retirement plans.
Special rules apply if you’re still working and participating in your employer’s retirement plan
You have to make the withdrawals by the date required — year-end for most individuals.
The penalty for failing to do so is substantial: 50% of the amount that wasn’t distributed on time
Weigh year-end investment moves
You shouldn’t let tax considerations drive your investment decisions. However, it’s worth considering the tax implications of any year-end investment moves that you make.
For example, if you have realized net capital gains from selling securities at a profit, you might avoid being taxed on some or all of those gains by selling losing positions
Any losses over and above the amount of your gains can be used to offset up to $3,000 of ordinary income ($1,500 if your filing status is married filing separately) or carried forward to reduce your taxes in future years.
Contact your tax and financial advisors to determine the best moves for your situation.