Our new Constitution is now established, everything seems to promise it will be durable; but, in this world, nothing is certain except death and taxes
– Benjamin Franklin, 1789
This quote from more than 200 years ago still rings true – nobody can avoid death or taxes, no matter how hard we try. But we can plan for both and lessen the burden on ourselves and our families.
Now that we are past the extension deadline for filing your 2021 taxes, it’s time to think about your 2022 taxes, and even your strategy for 2023. Even though many tax strategies should be implemented at the beginning of the year, there is still time to take advantage of certain tax breaks for the current year. October is a great time to start thinking about the current year as well as planning for the next tax year.
Ways to Save in the Current Tax Year
According to an article by TurboTax, there are 8 ways you can save, even this late in the year. In this article, we’ll summarize the simplest ones. You can read the full article to learn more.
Defer Your Income: Income is taxed in the year it is received, so if you are able to receive some of your December income in January, that will count towards your income for the following year. Of course, if you are an employee that is on a regular pay schedule, you may not have this option. But perhaps you could ask if an end of year bonus could be paid out after December 31.
This strategy is much easier for business owners because they can decide when to send those December invoices. Of course, it only makes sense to do this if you are sure the deferred income won’t put you in a higher tax bracket for next year. It’s always a good idea to check with your accountant before making this decision.
Donate to Charity: If you’re looking for more deductions this year, donating to charity is a great option. You can donate cash or get an increased tax benefit by donating stock or property. For more information on charitable tax deductions, talk to your accountant or visit this site. Just remember, you must have a receipt to back up your donations. The old rule that you only need a receipt for donations greater than $250 no longer applies.
Max Out Your Retirement: Tax-deferred retirement accounts can grow to a substantial sum because they compound over time free of taxes, so these are a great way to invest. One way to do this is to increase your 401(k) contribution so you are contributing the maximum amount allowed per year ($20,500 for 2022, $27,000 if you are age 50 or over).
Contributing to an IRA is also a great idea. You can contribute $6,000 per year (plus $1,000 more if you’re older than 50), and you generally have until April 2023 to make the contribution. But if you do it before the end of the year, the contribution is a deduction that will also reduce your taxable income and it will grow tax-deferred for longer.
Check Your IRA Distributions: If you are 70 or older, check to make sure you are taking the correct amount of required minimum distributions. They were suspended for 2020, but are required for 2021 and later. The penalty for not taking enough is quite large: a 50% excise tax on the amount you should have withdrawn based on your age, your life expectancy, and the amount in the account at the beginning of the year. After that, annual withdrawals must be made by December 31 to avoid the penalty. Talk to your financial advisor or tax professional for specifics and strategies.
Check Your Flex-Spending Account: Many companies offer this as a benefit that lets employees direct part of their pay into a special account which can then be tapped to pay child care or medical bills. The advantage is that the money you pay into the account avoids both income and Social Security taxes. However, you have to decide at the beginning of the year how much to contribute to the plan and, if you don’t use it all by the end of the year, you forfeit the balance.
Check to see if your employer allows a grace period, as permitted by the IRS, allowing employees to spend money set-aside in 2022 as late as March 15, 2023. If not, you can make a last-minute trip to the drug store, dentist or optometrist to use up the funds in your account.
Planning for Next Year
Tax laws are complicated and seemingly in a state of constant change. This is why we highly recommend finding a good CPA who is on top of the laws and knows how to apply them to your individual situation. As you can imagine, CPAs get busy right before the filing deadline, so it’s best to schedule your tax strategy session for next year a few months before the year starts. This will give you and your CPA enough time to review your situation and discuss all possible tax deductions and ways to maximize your return or minimize the tax you owe. If you don’t have a CPA, or you’re looking for a new one, feel free to reach out and we can recommend some of our favorite CPAs.
How Estate Planning Fits into Your Tax Plan
Depending on the size of your estate, your family dynamics, and goals for how your assets and legacy are passed on, estate planning can play a crucial role in saving you and your family taxes both during your life, and after you are gone. Because many estate planning tax strategies require your plan to be in existence for a few years before the benefits kick in, it’s best to start thinking about these strategies sooner rather than later. For example, if you haven’t considered whether you may need long term care in the future, and if so, how you’re going to pay for it, you should start thinking about that now because there is generally a “look back” period of 3-5 years before the tax benefits are realized.
To discuss whether you need to consider tax planning in your estate plan, contact us for a free 15 minute consultation.