Year-End Tax Planning for 2022

As of this writing, we are only about six weeks away from the end of 2022. If you have a lot to do before the end of the year, you’re not alone. And if year-end tax planning isn’t on your list, you may want to add it.

It’s tempting to put off thinking about taxes until you absolutely have to. But spending a little time on tax planning in the waning days of 2022 can yield benefits when you finally do put pen to paper (or finger to keyboard) to file your tax returns next year. Here are some end of year tax strategies to consider.

Double-check your income tax withholding

The amount of income tax you have withheld from your paycheck can determine whether you have a big tax bill or a big tax refund waiting when you file your income taxes for 2022. While nobody wants a to write a large check to the IRS, having an excessive refund isn’t great, either. It may feel terrific to see that cash land in your bank account, but that also means that you could have gotten some of that money in your paycheck all along. You could have been investing or saving it and earning interest instead of loaning it to the government, interest-free.

Not sure how to check your income tax withholding? The IRS offers an online tax withholding estimator.

Max Out Your Retirement Contributions

The government would prefer you to be able to be self-supporting in retirement. To that end, it is willing to give you a tax break if you contribute to that goal while you are working.

If you have a 401(k), you can contribute pre-tax dollars to your retirement account up until December 31, 2022, or your last paycheck of the year. The annual contribution limit for this year is $20,500, but if you are 50 or older, you are eligible for a “catch-up” contribution of another $6,500, or a total contribution of $27,000. Any contributions from your employer don’t count toward that limit, but employer and employee combined contributions cannot total more than $61,000.

If you’re not sure how much you’ve contributed so far, speak to your human resources department. You don’t have many paychecks left this year, so make them count. And if you can’t max out your contributions, at least try to contribute enough to maximize the contributions your employer will match.

If you have a traditional IRA, you can contribute up to $6,000 in pre-tax dollars in 2022, with an extra $1,000 catch-up contribution if you’re over 50. Contributions to a Roth IRA (as opposed to a traditional one) are made with post-tax dollars, so they won’t cut your tax bill this year–but they’re still a good idea, as qualified distributions will be tax-free. You also have a few extra months to contribute to an IRA for 2022, until April 18, 2023.

Contribute to Your HSA, and Use Up Your FSA

If you have a Health Savings Account (HSA), you can contribute pre-tax dollars to it to reduce your income tax burden. Contribution limits for this year are $3,650 for individual coverage and $7,300 for family coverage, with an additional $1,000 catch-up contribution for those 55 and older.

You probably think of your HSA as an account that you use to pay medical bills under your high-deductible health insurance. But there are lesser-known HSA benefits. For instance, you do not have to use up HSA funds before the end of the year, and you can leave them in the account to grow tax-free until your retirement.

However, if you also have a Flexible Spending Account (FSA) to which you contributed pre-tax dollars during the year, you DO generally have to use those funds before the end of the year, or lose them. If you have both an HSA and an FSA, use up FSA funds wherever possible and conserve the funds in your HSA if you can.

Consider Tax-Loss Harvesting

If you have an investment portfolio (other than the retirement plans mentioned above) you may be able to “harvest” losses on your investments to offset gains. You can sell certain taxable investment assets like mutual funds, stocks, and bonds at a loss, and apply that loss against capital gains you have realized, reducing your capital gains tax.

If your capital losses exceed your gains in a particular year, the IRS will allow you to apply up to $3,000 of those losses against ordinary income. If you still have losses left over, you are allowed to carry them forward to reduce your taxable income in years to come.

To benefit from tax-loss harvesting, you need to keep an eye on what’s happening both in your portfolio and in the market, so you should speak to your investment advisor if you are interested in this strategy.

Make a “Bunch” of Itemized Deductions

The 2017 Tax Cuts and Jobs Act nearly doubled the standard deduction for income tax filers, meaning that many people stopped itemizing deductions on their tax return and simply started claiming the standard deduction. However, there is a way to take advantage of both the standard deduction and itemizing deductions—in different years. It’s called “bunching” your deductions, including medical and dental expenses, charitable contributions, and deductible taxes.

To itemize, your expenses for a particular category must exceed a percentage of your adjusted gross income, or AGI. For example, there is a 7.5% threshold for itemizing medical expenses. If your medical expenses for 2022 are less than 7.5% of your AGI, you can’t deduct them. Medical expenses are deductible for the year in which they are paid, not the year in which they were incurred.

So, if you can put off paying some of your 2022 medical expenses until early 2023 (without going into collection or harming your credit), doing so may allow you to “bunch” those expenses with your 2023 medical expenses. That may be enough to put you over the 7.5% threshold for itemizing for next year.

Similarly, with charitable donations, you could make your “2022” donations on January 1, 2023, and your 2023 donations at the end of 2023. They would still be about a year apart, but both take place in the same tax year, making it more desirable to itemize in that year, but take the standard deduction in 2022.

To learn more about end of year tax planning and year end tax strategies, contact Estate Planning & Elder Law Services to schedule a consultation.