5 Simple Year-End Tax Planning Moves

Lauren Hunt, Senior Advisor

With year-end quickly approaching, taxpayers still have several weeks left to plan a strategy that could provide meaningful tax savings. Here are five year-end tax planning ideas that may work for you:

1. Increase Your 401(k) Contributions

For the 2022 tax year, the maximum deferral contribution to a 401(k) retirement plan is $20,500 for individuals under age 50. Individuals ages 50 and above can make a “catch-up” contribution of an extra $6,500, for a total of $27,000. By making voluntary contributions to a traditional 401(k) plan, whereby reducing your taxable income, the more money you contribute, the lower your tax bill will be for the current year. Consider increasing your contribution to elections during the remaining months of the year and review your elections again in January to spread out your contributions next year. The 2023 maximum 401(k) contribution deferrals are $22,500 for those under age 50 and $30,000 above age 50.

2. Charitable Contributions

Many retirees who contribute to their favorite charitable, non-profit organizations don’t receive a tax benefit since their standard deduction exceeds any itemized deductions. Account owners who are 70.5 and older in 2022 could benefit by using their IRA as the source of their giving via a strategy called a Qualified Charitable Distribution (QCD).

While you do not receive an itemized tax deduction for a QCD, the distribution itself is not taxed. Lowering top-level income could lead to other benefits, such as lowering Medicare premium surcharges and reducing the taxable amount of Social Security income. Keep in mind that the distribution must be taken directly from your IRA and distributed to the charity for the amount to be excluded from income. Account owners can donate up to $100,000 per year from their IRA, and the QCD amount counts toward your annual required minimum distribution so long as certain criteria is met.

For example, a person who turned 70 in January with a required minimum distribution of $10,000 chooses to donate $5,000 from their IRA to their local United Way or another qualified charitable organization after the person has reached age 70.5 during the year. Instead of reporting income of $10,000 for the year, the taxable reported distribution amount will now be lowered to $5,000.

Just be sure to make your charitable contributions by December 31 as there’s no grace period if you make them after year-end.

3. Tax-Loss Harvesting

When the price of stocks and mutual funds in a taxable brokerage account declines below their cost basis, you can sell them before the end of the year to capture the loss and, at the same time, exchange them into a similar, but not substantially identical, investment to maintain market participation. By doing this, you capture those losses on paper so they are reported on your tax return.

Because so many stocks have dropped in value during 2022 – including many losing 10 percent or more – it may be the right time to take advantage of this option. To the extent realized losses exceed realized gains, net realized losses can offset up to $3,000 of ordinary income with any remainder resulting in a loss carryforward to be used in future years.

4. Converting Individual Retirement Account Savings into a Roth IRA

Depending on your income, it could be wise to convert a traditional IRA into a Roth IRA. While you must pay ordinary income taxes today on dollars converted, the money inside a Roth IRA benefits from income tax-free accumulation indefinitely. In general, the more time you have to allow for the funds to compound income tax-free within the Roth IRA, the more compelling a Roth IRA conversion becomes.

5. Start Getting Organized

Employers and other entities must send copies of 1099s and W-2s to recipients by January 31. Start gathering your current tax year’s tax payments and any documentation you have for tax credits and deductions. If you start gathering your tax-related documents now, you’ll be set for a stress-free tax day.

We recommend consulting with an appropriately credentialed professional before making any financial or tax-planning-related decision

© 2022 Advisory services offered by Moneta Group Investment Advisors, LLC, (“MGIA”) an investment adviser registered with the Securities and Exchange Commission (“SEC”). MGIA is a wholly-owned subsidiary of Moneta Group, LLC. Registration as an investment advisor does not imply a certain level of skill or training.

The information contained herein is for informational purposes only, is not intended to be comprehensive or exclusive, and is based on materials deemed reliable, but the accuracy of which has not been verified.

Trademarks and copyrights of materials referenced herein are the property of their respective owners. Examples contained herein are for illustrative purposes only based on generic assumptions. Given the dynamic nature of the subject matter and the environment in which this communication was written, the information contained herein is subject to change. This is not an offer to sell or buy securities, nor does it represent any specific recommendation. You should consult with an appropriately credentialed professional before making any financial, investment, tax or legal decision. Past performance is not indicative of future returns. All investments are subject to a risk of loss. Diversification and strategic asset allocation do not assure profit or protect against loss in declining markets. These materials do not take into consideration your personal circumstances, financial or otherwise.


Additional articles