The tax-filing season will be here before you know it and certain tax matters are best considered before the calendar year ends. The IRS’s much-publicized hiring of tens of thousands of new agents means that this could be a particularly bad year to make a tax misstep.
Here are five tips that are worth considering in the final weeks of 2022…
- Stock market losses could create tax-loss harvesting opportunities
The stock market’s 2022 struggles have left many people with investments in their portfolios that are worth less than what they paid for them. One option: Before 2022 ends, sell some of these underwater securities. The resulting capital loss could reduce your tax bill by offsetting capital gains…or offsetting taxable income.
If you are in a “net loss position” for the year—that is, your capital losses exceed your capital gains—up to $3,000 of the losses can be used to offset ordinary income. Income tax rates range from 10% to 37%, so realizing that $3,000 net loss could deliver tax savings of anywhere between $300 and $1,110, depending on your tax bracket, and potentially state tax savings as well. Any additional losses realized can be carried over to offset capital gains or income in future years.
Worth noting: Tax-loss harvesting must be done by selling underwater investments from taxable accounts, not from tax-advantaged retirement accounts. If you do sell a security for tax-loss harvesting purposes, be sure not to repurchase the same security or a “substantially identical” security in any of your accounts in the 30 days before or after the sale, or “wash sale” rules prohibit deducting the capital loss.
- Give to Your Favorite Charity
Donating to your favorite charity before the end of the year not only allows you to help someone in need but can also help you save on taxes. Generally, you need to itemize your deductions to claim charitable donations. However, your total deductions must exceed your standard deduction amount in order to itemize.
A standard deduction is a flat amount by which the IRS allows you to reduce your tax bill based on your filing status. Standard deductions have been getting larger as the tax agency adjusts them in light of the highest inflation in decades.
For the 2022 tax year—meaning the taxes you’ll file in 2023—the standard deduction amounts are:
- $12,950 for single and married-filing-separately taxpayers
- $19,400 for head-of-household taxpayers
- $25,900 for married-filing-jointly or qualifying widow(er) taxpayers
But before you give, make sure your favorite charitable organization can receive tax-deductible donations. You can do so by checking the IRS’ Tax Exempt Organization Search Tool, which has the latest information about nonprofit organizations with tax-exempt status. You’ll need either the organization’s name or employer identification number (EIN) to complete your search.
- Maximize Your 401(k) Contribution
You generally have until Dec. 31 or your last paycheck of the year to contribute to a 401(k) retirement account. You can contribute up to $20,500 in 2022. For those ages 50 or older, you can contribute an additional $6,500, for a total of $27,000. Contributions from your employer don’t count toward the limits. The combined contributions from you and your employer for 2022 cannot exceed $61,000.
With the last paycheck of the year coming sooner than you might realize, you need to act now. Typically, you would contact your employer’s human resource department to increase your retirement contributions. It’s important to know how much you contributed this year to ensure you have yet to meet the contribution limit
- Zero-Out Your Flexible Spending Account, if Necessary
A flexible spending account (FSA) is a type of savings account with tax advantages: It lets you pay for qualified out-of-pocket expenses related to health care and dependent care with pretax money. You can stash away these pretax funds throughout the year for yourself, your spouse, or your dependents. Depending on your employer, you may need to use your FSA funds by Dec. 31. If you fail to do so, you may lose your money.
Though some employers may choose one of two additional options—a rollover feature or a 2.5-month grace period following year-end—it is important to speak with your employer to know if either feature applies to your FSA.
- You can be more generous with your heirs starting this year
The annual gift-tax exclusion increased from $15,000 to $16,000 this year. Taxpayers can give up to that amount to anyone they wish to without generating any taxes in the process and without using up a portion of their lifetime gift- and estate-tax exemption.
Giving large annual gifts to future heirs can be a useful strategy for people who have large estates. Estate taxes haven’t been a major concern for many families lately—as of 2022, the lifetime gift- and estate-tax exemption is a sizable $12.06 million, high enough that only extremely wealthy families face estate taxes. But that exemption currently is slated to fall to $5.49 million in 2025, and there’s no guarantee that it won’t be slashed further as the government seeks to increase tax revenue in the coming years.
Giving financial gifts to heirs during your lifetime removes money from your estate so it won’t face estate taxes later. That $16,000 annual exclusion might not seem substantial enough to make a meaningful dent in a multimillion-dollar estate, but it can add up quickly.
Example: A married couple with three married children and seven grandchildren could together give a total of $32,000 each calendar year—that’s $16,000 from each partner to each of their grown children, sons- and-daughters-in-law and grandchildren—removing more than $400,000 per year from their estate. Of course, they should do this only if they have the financial resources to make these gifts without endangering their own retirement.