The end of the year is a couple of months away, which means tax season is right around the corner. Get ahead of the game by knowing important upcoming tax dates and end-of-year tax planning strategies.
Last day to make any of the tax moves referenced below for the year.
If you have self-employment income or usually pay quarterly estimated taxes, the last estimated tax payment for 2022 is due.
Make a checklist of expected income documents including any W2s, 1099s, Schedule K-1s, or other documents related to income received from work or financial investments. Many of these documents will be sent out at the beginning of 2023 for this year’s taxes.
Since income is taxed in the year it’s received, if you’re self-employed and think you’ll be in the same or a lower tax bracket next year, consider delaying end-of-year invoices until late December.
If you’re not self-employed and your employer offers end-of-year bonuses, find out when the bonuses will be paid out. If it’s paid in 2022, you can look into options to offset the additional income if it will have a substantial impact on your taxes. For example, you could consider negotiating for more vacation time with your employer in lieu of the bonus. Another option is to check with your employer to see if your bonus can be added to your 401(k) account.
Whether you’re employed by someone else or self-employed, you can also defer income by taking capital gains in 2023 instead of in 2022. You do this by not selling appreciated investments such as stocks, mutual funds, ETFs, CryptoCurrency, etc.
Even if you’ve been making charitable donations throughout the year, you may consider donating to more verified nonprofits before year-end to deduct the donations against your adjusted gross income (AGI).
According to the IRS Temporary Suspension of Limits on Charitable Contributions as of October 2022:
In most cases, the amount of charitable cash contributions taxpayers can deduct on Schedule A as an itemized deduction is limited to a percentage (usually 60 percent) of the taxpayer’s adjusted gross income (AGI). Qualified contributions are not subject to this limitation. Individuals may deduct qualified contributions of up to 100 percent of their adjusted gross income. A corporation may deduct qualified contributions of up to 25 percent of its taxable income. Contributions that exceed that amount can carry over to the next tax year.
If you itemize tax deductions, you can also boost deductions by donating stock to a qualified organization or donating personal items such as clothing and home goods you no longer need using the fair market value.
A popular strategy to minimize federal income tax is to take advantage of deductions. When considering this tax strategy, you’ll need to choose between itemizing deductions or taking the standard deduction depending on which deduction lowers your federal taxes the most.
If you’re filing as a single taxpayer, or you’re married but filing separately in the 2022 tax year, the standard deduction is $12,950. The 2022 standard deduction for married couples filing joint tax returns is $25,900. For heads of households, the standard deduction is $19,400.
While taking the standard deduction is easier, itemizing your deductions may result in a higher deduction. But keep in mind you’ll need to maintain supporting documents such as receipts, bank statements, medical invoices, etc.
Examples of expenses that may be classified as itemized deductions include:
You may be able to bundle certain deductions to be able to itemize deductions in a year. An example of bundling would be instead of making an annual donation to a nonprofit organization, bundling the donation into a 2-, 3- or 5-year bundled payment. This larger one-time bundled donation, in addition to other itemized deductions, could put you over the threshold for the standard deduction.
Take advantage of tax-deferred retirement accounts, such as 401(k) plans to lower your taxes by contributing the maximum amount of money allowed ($20,500 for 2022; $27,000 if you are age 50 or over).
While it depends on your employer and your plan, many allow participants to change the amount of their 401(k) contributions at any time.
If you participate in an employer-based Health Savings Account (HSA) or Flexible Spending Account (FSA), you may want to fill up the account to its limit before the end of the year to either defer taxes or secure a larger deduction.
If you’re self-employed or have secondary freelance income, you may want to open a solo 401(k) plan. To take advantage of this option for 2022 taxes, the plan must be opened by December 31. You have until April 18, 2023 (or the extension of your tax return) to contribute up to $20,500 ($27,000 if you’re 50 or older) to the plan and take advantage of the deduction for 2022. You can also make a profit-sharing contribution of up to 25% of your compensation.
If you hold stocks, bonds, shares, or even cryptocurrencies that are losing money, you may consider selling them to offset capital gains you’ve made elsewhere. This strategy, known as “tax loss harvesting”, can help reduce your tax burden, although there are limits to how much you can write off. The IRS will allow you to apply up to $3,000 in losses against your other income in a year when your capital losses outweigh gains.
Working with an experienced CPA firm like Wendroff & Associates on Tax Planning and Preparation can help you navigate these strategies to ensure you get the best possible tax result in 2023. To set up a free consultation, please click on the button below to schedule a time that works best for you.