Thinking about year-end tax planning is about as much fun as waiting in line at the DMV, but it’s something that could save you some money so it’s always a good thing to take a look at your financials before the end of the year.
Below are some items that may help you lower your 2022 taxes:
1. Spend any leftover cash that is in your flexible spending accounts.
If you have a Flexible Spending Account and have money left, get caught up on your doctor’s visits! While the old “use it or lose it” rule may not still apply, you may only be able to carry over $570 worth of unused money left in your 2022 FSA account at the end of the year. Your plan may also extend the amount of time you’re able to use your funds to 2 1/2 months after the end of the plan year.
2. Max out your retirement plan contributions to lower your taxable income.
Lowering your taxable income means paying less tax and it could also reduce the amount of Social Security subject to tax or any net investment income tax.
Contributing to a pre-tax retirement plan lowers both your adjustable gross income (front of the 1040 form) and your taxable income (back of the 1040 form). These plans include 401(k)s, 403(b)s, deductible IRAs, SIMPLE IRAs and SEPs. You have until Dec. 31st to make contributions to 401(k)s and 403(b)s for 2022. But for most other plans and IRAs, you can wait until when you file your taxes to make the contribution.
3. Sell your investment losers.
If you have realized capital gains this year, you might want to sell some of your losers in your stock, bond, or real estate portfolio to realize a loss before year end. This strategy, called “tax loss harvesting”, can reduce the amount of capital gains subject to tax. If your losses exceed your gains, you can apply $3,000 of that against your regular income. Any extra will then be passed to the next tax year. However, don’t sell just for the tax benefit. Make sure it makes sense based on your overall investment strategy.
4. Update paycheck withholding.
Tax reform and paycheck withholding changes almost always upset the balance that you want between the size of your tax refund and the size of your paycheck. Whenever there are changes to the tax code that affect your take home pay, you need to update your W-4 with your employer so you can continue to get the balance you want. For this year, it’s too late in the year to meaningfully impact your 2022 return, but updating your W-4 now means you can start off 2023 just how you want.
Please comment or send an email if you have any questions. Thanks!
Joe Baker, CFP®
Baker Asset Management, LLC
