Ben Franklin wrote, “… in this world nothing can be said to be certain, except death and taxes.”
If you’re reading this, you’re still alive. So unless you’re living off the grid, you probably will owe the government a 2022 tax return.
Take heed, though. There are some things you can do before New Year’s to ensure that your tax bill is as low as possible.
In this article, I’ll give you some strategies to implement before Jan. 1, 2023, to make sure you minimize your taxes.
Table of Contents
- Meet With Your CPA
- Tax-Loss Harvesting
- Contribute to Your Retirement
- Defer Income
- Accelerate Income
- Give to Charity
- Make a Roth Conversion
- Take All RMDs
- Empty Your Flexible Spending Accounts
- Gift Money to Family or Friends
1. Meet With Your CPA or Tax Advisor
The best time to be proactive about your taxes is during the actual tax year, money expert Clark Howard told me — not when it’s time to tabulate and pay your tax bill for the previous 12-month period.
Whether you run your own business, you’ve compiled a nice investment portfolio or you simply want to max out your deductions, the best time to meet with a tax planner is now.
I’ll get into several options to optimize your 2022 tax strategy before Jan. 1, 2023. But it’s important to talk to your CPA or financial advisor to sort out the particulars of what will work best for your specific situation.
2. Tax-Loss Harvesting
Have you made an investment that has declined in value? That’s not always a terrible outcome.
You can sell your losers (stock that has declined in price, for example) to realize a loss. This can offset capital gains that you’ve made in 2022. The process is called tax-loss harvesting.
If you realize more losses than gains, you can also deduct up to $3,000 against your taxable income for the year. Lose more than that and you can roll over the losses to subsequent years, up to the $3,000 annual limit, indefinitely.
Beware of wash sale rules. In most cases, you can’t sell an investment at a loss solely for tax purposes and rebuy that same investment to “restart the clock” within a short time period.
You also need to be aware of your short- and long-term capital gains tax rates when you sell any investments at a profit.
Does that sound complex or confusing? That’s why it’s an excellent idea to work with your tax advisor.
3. Contribute to Your Retirement Accounts
Contributing tax-deferred dollars to government-sanctioned retirement accounts can lower your taxable income for the current year.
For example, in 2022, individuals are allowed to make up to $20,500 in tax-deductible 401(k) contributions — $27,000 if you’re 50 or older.
Keep in mind that Clark prefers Roth 401(k) and IRA accounts to traditional accounts. Roth contributions are made with post-tax dollars, meaning you get zero tax deductions now but owe zero taxes when you withdraw the money in retirement.
You can earn a tax deduction by contributing to a traditional 401(k) or IRA. Technically, you have until April 2023 to contribute to an IRA for your 2022 tax bill.
If you have access to an HSA plan, you can reduce your taxable income by contributing to it. Most contributions to 529 plans offer state tax deductions.
4. Defer Income
Perhaps you’re close to spilling into a higher federal income tax bracket in 2022. Or maybe you need to lower your tax liability for the year.
In any case, you may be able to defer some income to 2023 so it won’t count against your 2022 taxes.
Deferring investment income is one of the simplest ways to accomplish this. Instead of selling stock in November or December, consider waiting until January — especially if you’re going to realize a gain (and owe capital gains tax).
If you get a year-end bonus from your company, you may be able to request a hold on it until January 2023.
If you’re self-employed or if you do freelance or consulting work, you can probably delay a few invoices until late December so that you don’t receive payment until January.
These are just a few examples of deferring income.
This makes particular sense if you expect to be in a lower tax bracket in 2023.
5. Accelerate Income
If you’re in a lower tax bracket or are making less money in 2022 than you expect to earn in 2023, you may want to stack as much income as possible into December 2022.
If that’s your situation, it could be a great time to realize big investment gains, sell a house, or collect a payment you’re owed.
You may owe less in taxes by receiving that money in this calendar year, especially if you expect to make more next year or anticipate your tax rate will increase.
6. Give to Charity
The standard tax deduction for an individual in 2022 is $12,950 ($25,900 for married couples filing jointly). That makes it difficult to itemize charitable donations. In most cases, the standard deduction will be higher.
If you’re in a unique situation where it’s better for you to itemize your deductions rather than accept the standard deduction, though, charitable donations are worth considering when calculating your tax bill.
You can also make a qualified charitable distribution from a retirement account in order to satisfy your annual Required Minimum Distribution (more on that later).
7. Make a Roth Conversion
With a traditional IRA, you’ll defer taxes on the money you contribute. That will lower your tax bill now but increase it later when you withdraw the funds in retirement (when you’ll likely be in a lower tax bracket).
You can also put post-tax dollars into a Roth IRA. You’ll owe taxes immediately. Then the money will grow tax-free until you withdraw it — also tax-free, assuming you follow the age guidelines.
The government imposes income limits for Roth IRA contributions (and for tax-deductible traditional IRA contributions).
However, no matter how much money you make, you can contribute to a traditional IRA and then roll the funds into a Roth IRA. This will force you to pay taxes on the amount you’re putting into the Roth IRA.
“If you had a particularly lousy [year], you might be better off eating some taxes now,” Adam Markowitz, CPA and vice president of Howard L Markowitz PA, told CNBC in 2021.
In other words, if you’re in a lower tax bracket due to lower-than-usual income — or if you’re further away from the next-highest tax bracket — it may be the perfect time to make a Roth conversion.
8. Take All Required Minimum Distributions
After your 72nd birthday, the IRS requires you to withdraw a certain amount of money from your retirement accounts each year. These are called Required Minimum Distributions or RMDs.
If you’re of the age, it’s vital that you take care of your RMDs. Failure to do so will result in IRS penalties of 50% on every dollar you fall short.
9. Empty Your Flexible Spending Accounts
A flexible spending account, or FSA, allows you to pay for qualified expenses (often out-of-pocket medical expenses) with pre-tax dollars.
Some employers offer flex plans as an employee benefit. Typically, the funds inside an FSA are “use it or lose it.” So if you have a flex account for 2022, you’ll need to spend the money by a certain date before it evaporates.
10. Gift Money to Family or Friends
You’re allowed to gift any person up to $15,000 in a given year without the IRS charging you a gift tax.
That’s handy if you have more money than you need and want to give some to a relative or friend.
I can’t emphasize enough how important it is to work with your tax advisor. You don’t have to wait until days or weeks before the tax deadline to meet with your CPA.
Sure, having some help with your tax return can be important. But using that person’s expertise during the rest of the year can sometimes be even more beneficial financially.
It’s also easy to procrastinate when you’re not staring down an immediate tax deadline. But there are often steps you can take before the end of a calendar year to lower your tax bill.