With the end of 2022 just a few weeks away, you may be thinking of last-minute moves to reduce your taxable income for the year. Fortunately, there are a few things you can do before the end of the year to reduce your tax liability. Just make sure you don’t wait until the last minute as some transactions may not occur before 2023 if you initiate them too late.
Make Charitable Contributions
Gifting appreciated assets to charity is a smart move for a few reasons. First, you might avoid paying capitals gains on the securities when you sell them. Second, if you itemize your deductions, you can get a tax deduction from your contribution. Third, the charity that you give the securities to will also benefit.
If you’re 70 ½ or older, you can donate up to $100,000 directly from your IRA. However, if you’re turning 72 in 2023, consider waiting until after December 31 to donate from your IRA for the 2022 tax year. If you also donate money out of your IRA in 2023, these can qualify towards your required minimum distribution.
Sell Losing Investments
If you sell an investment like a stock and take a loss, you might be able to save on some taxes. This strategy for reducing tax liability is known as “tax loss harvesting.”
One caveat: don’t buy the same investment back within 30 days of selling it. If you do, you won’t be able to apply the loss from the sale to offset your taxes.
Make Contributions to Qualified Savings Accounts
- If you have a health savings account (HSA), you can contribute to it up until December 31, 2022 to reduce your taxable income for the year.
- If you have an employer-sponsored retirement plan, such as a 401(k), you must also make sure all contributions are made before December 31 to reduce your taxable income for 2022.
If you have an IRA (traditional or Roth), you have a bit more leeway. You can contribute to your IRA up until April 15, 2023 and still reduce your tax burden for the 2021 tax year.
- If you contribute to a 529 college savings plan, you can reduce your state tax bill in more than 30 states. Most states have a deadline of December 31 for contributions to apply to that tax year. However, several have extended contribution deadlines of either April 15 or April 30 of the following year (Georgia, Iowa, Mississippi, Oklahoma, South Carolina and Wisconsin).
Also a note about flexible spending accounts (FSAs). If you made contributions to an FSA, make sure to spend that money down. Otherwise, those unspent contributions will be considered taxable income.
Minimize Taxes in Advance With a Personalized Financial Plan
Looking for more ideas to lower your tax liability for 2022? One of our advisors can help identify opportunities based on your unique financial situation — and create a plan for 2023 that takes advantage of all available tax reduction strategies ahead of time. Click here to schedule a no-cost, no-obligation consultation to get started.