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What You Should Do Before 12/31 to Save Tax

What You Should Do Before 12/31 to Save Tax

December 01, 2022
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Once again, it is time to consider your year-end tax saving strategies. Essentially, year-end tax saving involves timing the income and deductions to reduce tax liabilities permanently or postpone them over a period of several years. Unfortunately, the actual process is not that simple in today's changing environment. Therefore, now is a critical time to plan a year-end tax saving strategy for yourself and potentially reduce your taxes and achieve your long-term financial goals.

Overall, the saving objective is  to achieve your personal financial or business goals in the most "tax efficient" manner possible. In addition, minimizing taxes enhances  investment and business returns in general. Although tax planning is the most effective if you have been doing it throughout the year, many tax saving strategies can still be identified and implemented as year - end approaches. Not every tax saving opportunity is appropriate for every person, but identifying specific saving ideas that work for you can reduce your taxes significantly.

Use the checklist below as a guide of actions you can take for your year-end tax saving.


Retirement Accounts

  • Maximize contributions to company retirement accounts such as 401(k). If you are under age 50, your maximum 401(k) contribution is $20,500 in 2022. If you are 50 or older, you are allowed additional $6,500 catch-up contributions. If you cannot max out your 401(k) contribution, make sure at least contribute enough to get whatever your company is willing to match. Getting the full employer match helps you save the most and take advantage of all the benefits offered by your employer. Review your company 401(k) plan and utilize the after-tax contribution feature if available.
  • You can contribute a maximum of $6,000 to an IRA for 2022, plus an extra $1,000 if you are 50 or older


Tax Loss Harvesting

  • Selling investments like stocks and mutual funds to realize losses. You can then use those losses to offset any taxable gains you have realized during the year. Losses offset gains dollar for dollar.
  • If your losses are more than your gains, you can use up to $3,000 of excess loss to offset other income.
  • If you have more than $3,000 in excess loss, the excess loss amount can be carried over to the next year. You can use the excess loss amounts next year to offset any 2023 gains and up to $3,000 of other income. You can carry over losses every year for as long as you live.


Flexible Spending Account

  • With the end of year approaching, check to see if your employer has adopted a grace period permitted by the IRS, allowing employees to spend 2022 set-aside money 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 the account.


Avoid the Kiddie Tax

  • For 2022, if a child's investment income is above $2,300, the kiddie tax will kick in and tax the child’s investment income at the same rates as the parents.
  • If the child is a full-time student who provides less than half of his or her support, the tax usually applies until the year the child turns age 24.


Required Minimum Distribution (RMD)

Remember to take your required minimum distribution (RMD) if you are over age 72 or if you have certain inherited IRAs. If you don’t take an RMD, you could be subject to a 50% penalty on the portion not taken. We can calculate your IRA RMD for you, or you can use our easy RMD Calculator at https://www.taurus-fin.com/resource-center/retirement/estimate-your-rmd

  • You must take an RMD from:
    Individual Retirement Accounts (IRAs)
      - Traditional
      - Rollover
      - Inherited
      - Simplified Employee Pension (SEP)
      - Savings Incentive Match Plan for Employees (SIMPLE)
    Qualified Retirement Plans (QRPs)
      - Individual 401(k)
      - 403(b)(7)
  • You do not need to take RMDs from Roth IRAs unless you have inherited one. Of note, Roth 401(k) accounts are still subject to RMD rules.


Equity Compensation Planning

Review your tax withholding for the equity compensation. If you found out that you are potentially subject to a penalty for underestimated payments, please consider increasing withholding amount from the wages.

Some key points to look at:

  • RSU income is withheld at a flat 22% tax rate (37% tax rate for the supplemental income amount exceeds $1mm)Choose a RSU vesting method that is suitable for you.
  • Evaluate the time value of tax amount on an NQSO exercise as well as the estimated taxes owed.

Carefully evaluate the alternative minimum tax (AMT) impact to make an informed decision when exercising ISOs and NQSOs


Donation

  • A gift to a donor-advised fund can be used to secure a charitable tax deduction in 2022 while defer a distribution to a public charity to a later year.
  • “Give away the gain”: Give appreciated assets held longer than one year to a public charity to get a fair market value income tax charitable deduction while avoiding income tax on the appreciation. The 3.8% surtax on net investment income, if applicable, will also be avoided.

If you are over 70 1/2 years old, you may consider making a direct transfer from an IRA to a public charity. The distribution is excludable from gross income if certain requirements are met.


Annual Gift Exemption

  • Take advantage of the 2022 annual gift exclusion to transfer wealth to future generations or to make tax-free transfers on behalf of another individual by paying education or medical expenses directly to the provider.
  • The 2022 annual gift exclusion allows for tax-free gifts up to $16,000 per donee without it counting toward your lifetime gifting exemption. (e.g., 529)


Estimate Tax

  • Review your income tax withholding and estimated tax payments to evaluate if you need to ask your employer to increase the withholding of state and local taxes.
  • Amounts withheld are deemed to be paid equally over each quarter, which can minimize or eliminate an underestimation penalty in the previous 3 quarters.


Defer Income and Accelerate Deductions

  • Defer net investment income to minimize or avoid 3.8% surtax on net investment income, which applies to $250,000 for married filing jointly returns.
  • Work with your financial advisor to strategically allocate the invest products that can be used to defer investment income


As discussed in the beginning of this article, now is a critical time to review and evaluate your year-end tax planning strategies to potentially reduce your taxes and help you achieve your long-term financial goals. Work with your financial advisor to ensure the strategies suit your overall financial plan. In addition, we have a seminar talking about the tax strategies you can adopt before the year-end next week on Wednesday (12/7). Feel free to register here:

https://us02web.zoom.us/webinar/register/3916699154603/WN_3MkKfWwPSNyqrA7kZ7oUkA