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5 Year-End Tax Moves That Could Reduce Your Tax Burden

The end of the year is rapidly approaching. You remain focused on the holidays right now, which is understandable. However, focusing on your taxes is equally as important as now is the perfect time to make certain moves that will reduce your tax burden next year. 

Increase 401 (k) Contributions

Every person who has an employer-sponsored retirement plan needs to take full advantage of the savings. This plan allows you to save for retirement while getting a break on your taxes. You make these contributions pre-tax, in most cases, which means your taxable income decreases. 

The amount you can contribute depends on your age. In 2022, individuals under the age of 50 can contribute $20,500 or less into their employer-sponsored retirement plan. Individuals 50 years of age and older may contribute up to $27,000. 

Many employers choose to match a portion of these contributions. A recent study in 2022 found that employers typically matched 4.4 percent of an employee’s contributions to this fund in 2021. 

However, don’t stop contributing once you meet this match. By contributing the full amount allowed under law, you reduce your taxable income, so you win in both ways. 

If you haven’t been making the maximum contributions all year, work with a tax professional to see if you can make up lost ground. You might find you can contribute the maximum amount, so long as you do so before the end of the year. A tax professional at Abacus Tax, can help with this. 

Defer Income and Accelerate Expenses

When possible, defer income until January 1, 2023. Doing so allows you to defer any taxes associated with that income for a full year and possibly longer. For instance, if you are selling a house and someone buys it the first week of December, try to delay the closing until January 1, 2023. 

By doing so, you will not need to pay taxes on the sale until the following year. If the sale closes before the end of 2022, the taxes come due in April 2023. Waiting until January 1, 2023 allows you to put that money in savings or invest some of it and allow it to grow.

 In addition, you have an entire year to minimize your tax burden and save more of that money. This one step could lead to significant savings on your taxes in 2024. 

If you are self-employed, hold off on invoicing clients until close to the end of the year. Some, if not all, of these clients won’t remit payment until next year. Although you will still pay taxes on the income, you have more time to figure out how to reduce your tax burden. 

Individuals who work for an employer and will receive a bonus before year’s end may want to speak to the employer to see if they can defer the bonus until January. This might not make sense for everyone, but it could be of help to an individual who finds they will move into a higher tax bracket once they receive this bonus. 

Another option is to prepay expected expenses before the end of the year. Look at any recurring expenses you may use to offset income. This may be rent or marketing expenses, and many people choose to purchase computers or equipment for their business in December to benefit from tax savings. They don’t wait until the new year to make these investments. 

Required Minimum Distributions

Don’t forget your required minimum distributions each year. You must withdraw this money from certain investment accounts or pay a penalty. The Internal Revenue Service put this requirement into place because they didn’t want people keeping their money in retirement accounts indefinitely to avoid paying taxes on the money. 

In 2020, the agency raises the age for required minimum distributions to 72 years old. You may leave this money in your account when you turn 72, so long as you make the required withdrawal by April 1 following the year you reach this milestone. Once you begin making these withdrawals, you must do so each year, taking the current RMD calculation into consideration. 

If you don’t take the required amount out of the account, the IRS imposes penalties. This penalty could be 50 percent of the amount you failed to withdraw from the account when you were supposed to. Avoid this by setting up a schedule to have this money withdrawn, so you never forget to take this step. 

Benefit from Investment Losses

The stock market has seen fluctuations that would make any person’s head spin. However, you may find there are benefits to the wild swings seen in the markets. Tax-loss harvesting might help you save money on your tax bill. 

The key to this strategy lies in knowing when to sell securities at a loss, so you can offset any capital gains tax you may own as a result of selling profitable securities. When used properly, this strategy will help you reduce your short-term capital gains tax bills. This is important because short-term capital gains typically come with a higher tax rate than long-term gains. 

Using this method allows you to offset the long-term capital gains. It allows you to preserve the value of your portfolio while paying less in taxes. When capital losses exceed capital gains, you can deduct net losses from your total annual income, up to $3,000. 

The IRS prohibits investors from deducting more than their total capital losses for that year. However, it allows any additional losses to be carried forward, so the loss can still benefit you in the future. However, there are restrictions, so it is best to speak with a tax professional to ensure you apply this strategy correctly. 

In addition, the financial advisor will help you analyze your portfolio strategically. You want to make certain you avoid any wash sale loss limitations. It would be very disappointing to sell stocks hoping to save on taxes, only to find you can’t because of IRS rules in place you were unaware of. 

Share the Wealth with Others

One way to reduce your tax bill is to share your wealth with others. Deduct up to 60 percent of your adjusted gross income by making cash donations to qualified charities. 

Consider using a donor-advised fund to make these contributions because you won’t have to recognize capital gains, and the IRS allows you to deduct the full fair market value of your donation. However, the agency limits this deduction to 30 percent of your adjusted gross income. 

In addition, individuals over the age of 70-1/2 may donate up to $100,00 to their charity of choice from their individual retirement account. This is done with the help of a qualified charitable distribution. 

While you won’t get a tax deduction for this contribution to the charity, it helps satisfy the required minimum distribution and won’t add to your taxable income. This means you will pay less in taxes while knowing you have helped a worthy cause. 

With the help of Abacus Tax & Books, you may find other ways to reduce your tax burden. For example, you may find you can help loved ones by providing them with a gift this year. Although this won’t reduce your tax burden, it allows you to transfer your wealth tax free. We also provide clients with ongoing bookkeeping support to simplify operations and keep all financial information in one location. 

Our team will help you find ways to make the most of your money both now and when you are gone, as you deserve to keep as much of it as you can and pass on what you will no longer need. These year-end tax moves go a long way to helping you achieve this goal. Give us a call at 803-548-1099 or visit us online to get started saving your earnings before 2022 ends!