End of the year is coming up, but before the party gets going, there are some financial planning strategies and tactics you may want to take advantage of so that your wealth-building plan starts 2023 in great shape.
Reducing your taxes is always a good idea, but some forward-thinking can help you lower the bill this year and potentially keep it lower in the future. Strategies to keep your money in your pocket are always important.
Tax-advantaged savings for education, retirement, and healthcare are a great way to get that process started.
Another area to think about is your investment portfolio.
With the struggling market, we’ve seen this year, asset allocations may have drifted beyond targets as asset values decreased. Getting them back in line will require selling positions – realizing a loss in some positions could save you money in taxes this year or in the future.
If you have a charitable giving strategy and make the gift from a tax-deferred account, your gift can eliminate your required minimum distribution this year and potentially lower RMDs in future years.
First Up: Tax-Advantaged Education, Retirement, and Healthcare Saving
If you have an employer-sponsored 401(k) account, contributing enough to qualify for the employer matching contribution should be a priority. Otherwise, you’re just leaving money on the table that could come in very handy when you’re retired. If you can save more but have not maxed out your contributions you still have time to increase your contributions over the few pay periods that are left this year.
Business owners, it might make sense to make that distribution and fill up your 401(k) contributions for the year.
The maximum you can put into a 401(k) account in 2022 is $20,500 if you’re under 50 and an additional $6,500 for those 50 and above.
It may be a stretch, especially during holiday season, but the tax savings and the extra time to grow, can really make it worth contributing as much as you can.
Health insurance can also provide tax-advantaged savings if you have a High Deductible Health Plan and you set up a Health Savings Account. For 2022, the IRS defines a high deductible as at least $1,400 for an individual or $2,800 for a family.
HSAs allow you to save and invest money now to be used for medical expenses in retirement. HSAs are “triple tax-advantaged”, meaning that they are funded with pre-tax dollars, grow tax-free, and withdrawals are not taxed if spent on qualified medical expenses. Unused balances are carried over to the following year, funds never expire, and they can be passed on to a surviving beneficiary.
For 2022, individuals can contribute $3,650, and families can contribute $7,300.
If you have children or grandchildren, chances are you’re thinking about how to pay for education. There’s a type of education saving and investing account called a “529 Plan” that provides a tax advantage because the growth of the investments is not taxed when the funds are withdrawn. Since these funds don’t have the longer time horizon of retirement plans, they need to be invested a little more conservatively – which makes it even more important to save early, consistently, and as much as you can afford. In Illinois, as a parent, you can deduct the first $10,000 per spouse from state income. That can be a savings of $990 per household for a married couple (based on a $20,000 contribution ad IL 4.95% income tax rate).
Let’s talk about investment strategies to save on taxes
You probably don’t usually scour your investment statement looking for losses. Those losses can be a very effective tool to save on taxes.
Tax-loss harvesting allows you to strategically sell positions that have declined and then offset gains in other areas of your portfolio either today or in the future.
It is the Season of Giving…
… but you’ll want to be sure that your charitable gift can be as big a benefit as possible, and that you also take advantage of tax-saving strategies. If you gift an appreciated stock directly from your account, you won’t have to pay capital gains, but you will get the full market value of the gift as a tax deduction.
Those over age 72 can use a qualified charitable distribution strategy that allows donations of up to $100,000 directly to a charity from an IRA instead of taking RMDs. This can help reduce taxes, which could mean staying in a lower tax bracket, and potentially lowering the amount of RMDs in future years.
We hope we’ve provided some food for thought in getting your financial plan in shape for a productive 2023.
Have a safe last quarter of 2022!
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Tax and/or legal advice is not offered by Christopher Clepp. Please consult with your tax professional for additional guidance regarding tax-related matters.