It’s the end of the year and our favorite holidays are upon us. We all know this is the season for spending, but we also have to think about planning for the end of the year so that we are able to increase our tax breaks before that ball drops in Times Square! How can we do this? Well, let’s take a dive.
First, you want to be able to defer as much income as possible. It is often better to postpone taxes.
If you’re a 1099 employee, you have the luxury of being able to defer end-of-the-year bonuses (if you get one) into the following year. This could make sense if you believe you will be in the same or lower tax bracket in 2023.
Make sure to maximize your contributions to your retirement accounts! Retirement accounts, like the Roth or Traditional IRA, are the biggest tax advantages that we all have as Americans. If you already hit the max on your match with your company sponsored 401(k) you now have another move to make. Turn to your Individual Retirement Accounts.
The most you can put into an IRA for 2022 is $6,000, plus an extra $1,000 if you are 50 or older. You can contribute up to your tax filing deadline.
Contributing to a Traditional IRA will reduce your taxable income for the year, but make sure you’re under the income limits. If you’re over the income limit to get a deduction, consider doing a “back-door” Roth IRA contribution.
If you hit the match to your 401(k) and then maxed out your Roth or Traditional (the limit is the total between the two, you can’t max out both), you would go back into your 401(k) or 403(b) for those school/VA jobs and max that out. The most you can put into a 401(k) in 2022 is $20,500, and if you are 50 years old and older you can put in $27,000.
If you happen to be self-employed or a solo small business owner, you might want to look into a Solo-401(k) plan or SEP IRA. You are able to contribute more into retirement with this account (Max is $61,000). And remember that in 2023 the limits of these amounts will be increased, but just don’t forget to contribute for this year and also for next year.
If you’re covered by a high-deductible health insurance plan, consider using a Healthcare Savings Account (HSA). There are tax benefits for contributing, and if you use the money for qualified healthcare costs, withdrawals are federally tax-free!
Lastly, if you are investing for your children don’t forget about the kiddie tax. You are able to invest for a child with the account in his/her name, for example through an UTMA custodial account, as long as the income from the investments isn’t more than $2,300!
The first $1,150 of unearned income for a child will be under the standard deduction, meaning not taxed. The next $1,150 will be at the child’s income tax rate. If you’d like to invest enough money that kicks off higher amounts of income than that, you are more than welcome to. But now the money invested will be taxed at the parent’s income tax rate.
Remember this is the season for giving so you are able to gift up to $16,000 per recipient for 2022 an annual gift tax exclusion amount without having to file a gift-tax return with the IRS. If you’re married, you and your spouse can choose to split gifts for a total of $32,000.
Talk with your tax professional to see what you can do to manage your taxes appropriately before the year ends. Happy Holidays and Happy New Year!