Question: Sean in Ft. Mitchell: Any end-of-year tax tips you can share?
A: Review your retirement contributions ASAP. This late in the year, you might only have one or two more pay periods to make any adjustments. In 2022 you can contribute up to $20,500 in a 401(k)/Roth 401(k) (up to $27,000 if you’re 50 or older). As a reminder, a 401(k) is a tax-deferred account that gives you a tax break now while a Roth 401(k) gives you a tax break down the road.
Also, if you’re set to receive a year-end bonus, take a look at your income this year versus what you might think it will be next year. If next year’s will be lower, see if your employer will defer that bonus until 2023. This way, you’ll pay taxes on that extra income during a tax year in which your tax bracket is likely lower.
Have any taxable investments that lost money? (Given the market’s performance this year, you probably do!) If you’re in a higher tax bracket, consider tax-loss harvesting. By selling these investments for a loss, you can off-set up to $3,000 of your ordinary income. Conversely, if you’re currently in a lower tax bracket, consider selling any gains – depending on your bracket you could potentially pay zero taxes on long-term gains! (But in either case don’t sell just for the sake of getting a tax break. Remember, your investment goals should have a long-term focus.)
Of course, there’s always the gift of charity. But don’t forget, charitable donations only reduce your tax burden if you itemize (the $300 above-the-line deduction for filers who took the standard deduction in 2020 and 2021 hasn’t been extended for the 2022 tax year).
And one more tip: If you have an FSA (Flexible Spending Account) be sure to spend all your money on qualified healthcare expenses by the end of the year – otherwise you lose that money. However, some employers offer FSA grace periods, so be sure to check with your HR department.
The Simply Money Point is that you need to hustle if you’re going to make any tax moves by the end of the year. As always, a trusted tax professional can help.