We’re all feeling a bit rushed at this time of year, and your income tax return is probably the last thing you want to think about. But with a bit of advance planning, you will have an easier time and possibly a smaller tax bill in the spring. Take the time to address these tax planning steps before the end of the year.
Double check your paycheck withholding. If you tend to owe a considerable amount to the IRS each spring, this is a sign that your paycheck withholding is incorrect. Consider increasing your withholding rate, or at least take note of the fact you might have underpaid. Save part of a year-end bonus or other cash just in case.
Prepay some deductible expenses. If you’re feeling concerned about a potentially high tax bill in the spring, you can prepay some deductible expenses before the end of the year. For example, mortgage interest, property taxes, college tuition, or medical bills could be paid before January 1 so that you can claim them on this year’s taxes.
Max out your retirement plan contributions. All money that you contribute to your retirement plan is non-taxable, and can seriously impact your overall taxable income. If you haven’t yet maxed out your contributions for the year, consider diverting more money to that account now. For 2022 you can contribute up to $20,500 to your retirement account, plus an additional $6,500 if you’re over age 50. Try to at least reach your company’s matching amount.
Plan to offset capital gains taxes. If you sold an asset (held for at least a year) at a profit in 2022, you will owe capital gains tax. One way to offset this tax is by selling an underperforming asset and claiming the loss.
Make your charitable gifts now. You can claim your charitable gifts as a considerable tax deduction when you file in the spring. But in order to count for the 2022 tax year, those contributions must be made by December 31. If you can’t decide on a charity now, consider establishing a donor-advised fund. You can deduct all of the money you contribute to the fund, and choose a charity later.
And of course, give us a call if you need help with any of these tasks. We can also help you identify additional year-end strategies as they apply to your situation.