We suggest our clients consider preparing for the upcoming 2023 tax season by taking advantage of a few important end-of-year tax strategies.

It's important that our clients take action on these tips by December 31, 2022 and find out if they can potentially minimize your tax burden in the spring.

1. Check your paycheck withholdings
The first step we'd suggest our clients take to prepare for the upcoming tax season is simply checking their paycheck withholdings. It's important to keep in mind that while an incorrect W-4 can result in an unexpected refund at tax time, it can also result in an unexpected tax bill. In 2020, the IRS eliminated the old system of withholding “allowances” and now allows employees to provide the specific amount by which they would like to increase or decrease their federal tax withholdings directly.

We suggest that our clients use the IRS Tax Withholding Estimator to find out if they’ve been withholding the right amount or to calculate their desired refund amount.

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Take action:  For our clients who need to make adjustments, file a new Form W-4 at your workplace that includes the added (or subtracted) withholding amount provided by the Withholding Estimator.

Tip:  This is a good time for our clients to confirm their state income tax withholding information (if applicable) as well.

2. Maximize your retirement account contributions
Next, we suggest our clients maximize their retirement account contributions. Tax-advantaged retirement accounts (such as a traditional IRA or 401(k) plan) compound over time and are funded with pre-tax dollars. That makes them a great investment in your future. They’re also helpful at tax time, since any contributions you make to these plans lower your taxable income.

For the current tax year, the maximum allowable 401(k) contributions are as follows: 
  • $20,500 up to age 49
  • $27,000 for age 50+ (including $6,500 catch-up contribution)

For the current tax year, the maximum allowable IRA contributions are as follows:
  • $6,000 up to age 49
  • $7,000 for age 50+ (including $1,000 catch-up contribution)

For any clients who have an HSA (health savings account), consider maxing out contributions for that account as well (currently $3,650 for individuals, $7,300 for families and an additional $1,000 for individuals age 55+).

Take action: For our clients who can’t make the maximum contribution to their 401(k), try to contribute the amount you are willing to match. All 401(k) contributions must be made by December 31 for that calendar year. However, you have a few extra months to make contributions to IRAs and HSAs up until the tax filing deadline in April 2023.

3. Take any RMDs from traditional retirement accounts (if you’re age 72 or older)
All sponsored retirement plans, traditional IRAs, and SEP and SIMPLE IRAs mandate required minimum distributions (RMDs) by the April 1st that follows the year you turn 72. Thereafter, annual withdrawals must happen by December 31 to avoid the penalty.*

RMDs are considered taxable income. If you don’t take the RMD, you face a 50 percent excise tax on the amount you should have withdrawn based on your age, life expectancy, and beginning-of-year account balance.

Take action: Take your RMD by December 31. Once you turn 72, you must take your first withdrawal on or before April 1 the following year to avoid penalty.

For clients who don’t need the cash flow and would prefer not to increase their taxable income, you may want to consider a Qualified Charitable Distribution (QCD), directly from your qualified account to a public charity. However, we'd like to remind these clients that they won’t get the charitable contribution itemized deduction. QCDs are limited to $100,000 per year. Unlike rules governing RMDs, you can make a QCD gift as early as age 70 ½ if you’re charitably inclined.

4. Consider a Roth IRA conversion
While the eligibility to open and contribute to a Roth IRA is based on income level, we'd like to remind our clients that they can convert some or all of the assets in a traditional IRA or workplace savings plan (e.g., 401(k)) to a Roth IRA. Roth IRAs can play a valuable role in your retirement portfolio; unlike traditional IRAs, Roth IRAs are not subject to income taxes at the time of withdrawal in retirement. This can give you more flexibility to manage your cash flow and future tax liability.

Converting qualified assets, such as 401(k) or traditional IRA assets, to Roth IRA assets is considered a taxable event during the conversion year. Any pre-tax contributions and all earnings converted to the Roth IRA are added to the taxpayer’s gross income and taxed as ordinary income.

Take action: We suggest that these clients talk with their tax advisor or financial professional to determine if a Roth conversion is right for them. For our clients who move forward with a conversion, try to manage the tax impact. One strategy is to convert amounts only to the level where you remain in your current tax bracket. You can utilize partial Roth IRA conversions over a period of years to manage the tax liability.

5. “Harvest” your investment losses to offset your gains
Tax-loss harvesting is a strategy by which you sell taxable* investment assets such as stocks, bonds, and mutual funds at a loss to lower your tax liability. You can apply this loss against capital gains elsewhere in your portfolio, which reduces the capital gains tax you owe.
In a year when your capital losses outweigh your gains, the IRS will let you apply up to $3,000 in losses against your other income, and carry over the remaining losses to offset income in future years.  

The goal of tax-loss harvesting is to potentially defer income taxes many years into the future — ideally until after you retire and would likely be in a lower tax bracket. This process lets your portfolio grow and compound more quickly than it would if you had to take money from it to pay the taxes on its gains.

Take action: Tax-loss harvesting requires you to diligently track tax loss across a portfolio, as well as monitor market movements since the chance for tax-loss harvesting can occur at any time. We suggest these clients talk to a financial professional who can help them identify any losses they can use to offset any gains.

*Note: Tax-loss harvesting does not apply to tax-advantaged accounts such as traditional, Roth, and SEP IRAs, 401(k)s and 529 plans.

6. Think about “bunching” your itemized deductions
Certain expenses, such as the following, can be classified as “itemized” deductions: 
  • Medical and dental expenses
  • Deductible taxes
  • Qualified mortgage interest, including points for buyers
  • Investment interest on net investment income
  • Charitable contributions
  • Casualty, disaster, and theft losses

In order to itemize, your expenses in each category must be higher than a certain percentage of your adjusted gross income (AGI). For example, let’s say you’d like to itemize your medical expenses. For the current tax year, the threshold for itemizing medical expenses is 7.5% of your AGI. If your medical expenses total 5% of your AGI, it wouldn’t be beneficial to itemize.

“Bunching” is a way to reach that minimum threshold. In this example, you could delay 2.5% of your expenses to the following year. Therefore, you’d be more likely to reach the minimum 7.5% of AGI that next tax season, allowing you to itemize.

Take action: For any clients who have been waiting on certain medical and dental expenses or charitable contributions, you might want to group these expenses to take the most advantage of itemizing the deductions.

7. Spend any leftover funds in your flexible spending account (FSA)
FSAs are basically bank accounts for out-of-pocket healthcare costs. An FSA earmarks your pre-tax dollars for medical expenses, lowering your taxable income.

When you tell how much of each paycheck to set aside for your FSA, remember you’ll pay taxes on any funds still in the account on December 31, 2022*. Plus, you’ll lose access to the money unless allowed a certain amount in rollovers for the next calendar year.

Take action: We suggest that our clients schedule any last-minute check-ups and eye exams by December 31, 2022. Fill prescriptions for you and your family. For our clients who are still carrying a balance, stock up on items approved for FSA spending (e.g., contact lenses, eyeglasses, bandages).

The Retirement Group is not affiliated with nor endorsed by your company. We are an independent financial advisory group that focuses on transition planning and lump sum distribution. Neither The Retirement Group or FSC Securities provide tax or legal advice. Please call our office at 800-900-5867 if you have additional questions or need help in the retirement planning process.

The Retirement Group is a Registered Investment Advisor not affiliated with FSC Securities and may be reached at www.theretirementgroup.com.

Tags: Financial Planning, Tax, Year-End, 2022, Strategies