Year-end Tax Planning

by | Dec 12, 2022 | Uncategorized

The window of opportunity for many tax-saving & financial planning moves closes on December 31, so it’s important to evaluate your situation now, while there’s still time to affect your bottom line for the 2022 tax year.

Roth conversions 

Done right, Roth conversions can accelerate your retirement goals quite significantly. Depending on factors such as tax rates and investing horizon, converting a pre-tax 401K or IRA to a Roth 401K or Roth IRA can put hundreds of thousands of extra after-tax dollars in your pocket throughout retirement. Furthermore, a silver lining to a down stock market this year is that one pays tax on depreciated assets, thus resulting in a comparatively lower tax bill.

When you convert a traditional IRA to a Roth IRA, or a traditional 401(k) account to a Roth 401(k) account, the converted funds are generally subject to federal income tax in the year that you make the conversion. If a Roth conversion does make sense, you’ll want to give some thought to the timing of the conversion. For example, if you believe that you’ll be in a better tax situation this year than next (e.g., you would pay tax on the converted funds at a lower rate this year), you might think about acting now rather than waiting. Whether a Roth conversion is appropriate for you depends on many factors, including your current and projected future income tax rates, investing horizon, and the taxability of your current retirement assets. We recommend speaking to your financial advisor before deciding if a roth conversion is the right strategy for you.

IRAs and retirement plans 

Take full advantage of tax-advantaged retirement savings vehicles. Traditional IRAs and employer-sponsored retirement plans such as 401(k) plans allow you to contribute funds on a deductible (if you qualify) or pre-tax basis, reducing your 2022 taxable income. Contributions to a Roth IRA (assuming you meet the income requirements) or a Roth 401(k) aren’t deductible, so there’s no tax benefit for 2022, but qualified Roth distributions are completely free from federal income tax, which can make these retirement savings vehicles very appealing. For 2022, you can contribute up to $20,500 to a 401(k) plan ($27,000 if you’re age 50 or older). If your 401(k) plan allows, you can contribute above and beyond this limit by contributing to the After-tax account and subsequently converting the money to Roth. Between you and your employer, the overall limit for 2022 is $61,000 ($67,500 if age 50+). Again, we recommend doing this with the assistance of a financial advisor.

Tax-Loss Harvesting

Tax-loss harvesting works by selling an investment in a taxable account at a loss to reduce taxable capital gains elsewhere. Realized capital losses above and beyond realized gains can be used to offset up to $3000 of ordinary income, with excesses above $3000 carried over to future tax years. When using this strategy, beware of the wash sales rule, which states that if you sell a security at a loss and buy the same or a substantially identical security within 30 days before or after the sale, the loss is disallowed for current income tax purposes

Timing is everything

Consider any opportunities you have to defer income to 2023. For example, you may be able to defer a year-end bonus, or delay the collection of business debts, rents, and payments for services. Doing so may allow you to postpone paying tax on the income until next year. If there’s a chance that you’ll be in a lower income tax bracket next year, deferring income could mean paying less tax on the income as well. Similarly, consider ways to accelerate deductions into 2022. If you itemize deductions, you might accelerate some deductible expenses like medical expenses, qualifying interest, or state and local taxes by making payments before year-end. Or you might consider making next year’s charitable contribution this year instead. Sometimes, however, it may make sense to take the opposite approach — accelerating income into 2022 and postponing deductible expenses to 2023. That might be the case, for example, if you can project that you’ll be in a higher tax bracket in 2023; paying taxes this year instead of next might be outweighed by the fact that the income would be taxed at a higher rate next year.

Ready to start planning for a brighter future? Call today at (408) 840-4030, or contact our team online.