December 7, 2022
The hustle and bustle of the holiday season is upon us, and festiveness is in the air. With 2023 rapidly approaching, there is still time to make some shifts in your tax position that will benefit you in the new year. Here is a list of our suggestions for tax planning in 2022.
Harvest Tax Losses. It’s been a rough year for many investors. Offsetting any capital gains with capital losses you’ve experienced is one way to lower your tax liability. To take advantage of this technique, the taxpayer must first sell the investment that is causing a loss. They will then use that loss to reduce the amount of taxable capital gains they have to claim. The money is then reinvested into a different, and hopefully better performing, security.
There are different tax rates for long term and short term (less than a year) capital gains. Additionally, a long- term loss would first be applied to a long-term gain and, likewise, a short-term loss to a short-term gain. The wash-sale rule also applies to these transactions. This rule states if you sell a security at a loss, you cannot purchase the same or substantially identical security and still take advantage of these tax savings.
Contribute to an Individual Retirement Account. Whether you have a Roth or Traditional IRA retirement account, putting money towards your future retirement is beneficial in many ways. For 2022, you have until the filing deadline of April 15, 2023, to contribute up to $6,000 for those under age 50, or $7,000 if you are 50 or older by the end of the year. There are different rules for self-employed individuals, so be sure to check with your advisor before making any contributions.
While contributing to a Roth IRA will not reduce your immediate tax liability, it can be withdrawn in retirement without adding to your future tax bill. Traditional IRA contributions are made pre-tax, so they can help reduce your tax bill in the present.
The amount contributions will save you will vary by type of plan, the tax bracket you are classified in, and the number of years you keep the money invested.
Charitable Contributions. If you itemize on Schedule A, you have the opportunity to reduce your tax liability by donating to qualified charities. Cash donations may not exceed 60% of your AGI (adjusted gross income) and non-cash donations may not exceed 30% of your AGI.
Another strategy is to donate stock directly to the charitable organization. This will reduce liability for capital gains tax.
Every situation is different. Talk to your tax advisor while there is still time to take advantage of valuable tax liability reducing strategies.