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Don’t Miss These Smart Tax Moves Before It’s Too Late

Castlepoint Blog: 401k, Financial Planning Basics, IRA, Kendall's Counsel, Retirement Savings & Income, The Point
December 14, 2022

December is here, which means it’s time to finish your holiday shopping (or start!), but it’s also time to wrap up your 2022 financial and tax planning. Most of us know that we can reduce stress with gift-giving by doing it now. In a similar way, you can increase your peace of mind by taking action on smart-planning items now. Here are five tax-savings tips to consider this holiday season

Tip 1#: Go Roth

A Roth conversion is a powerful wealth-building strategy. Here’s how it works: You transfer assets in your existing Traditional IRA into a Roth IRA and pay taxes at your current ordinary income tax rate on the amount converted.  The beauty of this strategy is that you can secure future tax-free growth and withdrawals with converted amounts.1

Make sure you consider these three factors before considering a Roth conversion:

  1. Tax bracket. If you expect to be in the same tax bracket or higher in the future, it might make sense to “prepay” those taxes today by converting to a Roth instead of paying a higher tax rate on future IRA withdrawals.
  2. Cash outside IRA to pay taxes. Ideally, you want to pay the taxes on the Roth conversion with cash outside of your Traditional IRA.
  3. Beware of Medicare premiums. If you’re on Medicare, you should watch your adjusted gross income (AGI), as it impacts your Medicare Part B premiums. The higher your income, the more you might spend on premiums so any converted IRA amounts will have an impact.

Tip #2: Makes Your Losses Work for You

The markets have not been kind to investors this year, but sometimes when you lose you can still win with taxes. Here’s the way it works: in your taxable accounts, look for securities that have a capital loss 2, which means the current value is less than the price paid, or cost basis.

For example, if you bought a mutual fund for $10,000 at the beginning of 2022, and it is now worth only $8,000, you can sell this fund and take a $2,000 capital loss. If you want to keep your money invested, you can immediately buy a different mutual fund and keep your money working for you. Just be careful not to buy the same mutual fund or security so that you don’t violate the “wash-sale rule,”3 which will disallow your capital loss.

If you’re married and filing jointly, you typically can deduct as much as $3,000 of realized net losses each year from your overall income, including wages. If you’re single, or filing separately from your spouse, the annual limit is $1,500. All excess amounts get carried over into the future for future tax savings. 4

Tip #3: Make the Most of Giving

One of the best gifts you can give this holiday season is a charitable gift because it can help a worthwhile cause important to you and provide some tax relief. Unlike 2020 and 2021, there is no $300 or $600 charitable deduction if you are taking the standard deduction. If you plan to itemize for 2022 and take the standard deduction in 2023, you may consider bunching both years of charitable contributions in this year to maximize deduction opportunities. Doing so will allow you to increase the likelihood of deducting your charitable donations.

Instead of cash, you also can donate stocks or securities that you’ve held for a while, which have large unrealized capital gains. You generally will be able to deduct the market value of these gifts and avoid paying tax on long-term capital gains. 

A donor-advised fund (DAF) is a great idea if you plan to make large charitable donations but are still uncertain of the charity you want to contribute. A DAF will allow you to deduct the entire contribution and distribute the grants to charities of your choice in the future. 5

If you are at least age 70½, an additional way to achieve giving goals and lower your tax bill or future tax bill is through Qualified Charitable Distributions (QCDs). You can transfer up to $100,000 from your Traditional IRA directly to a charity each year.  The benefit of the QCD is that it satisfies any required minimum distributions (RMDs) and helps keep your tax bill lower. 6

Tip #4: Achieve Your 401K Contribution Goal and Maximize Your IRA and HSA Contributions

If you’re still employed and are saving towards a retirement goal, check to see if you’re on track to maximize your 401(k) contributions for 2022. Those under age 50 can sock away $20,500, and folks ages 50 and older can contribute $27,000. 7

Also, think about maximizing your IRA and Health Savings Accounts (HSA) before the end of the year. It’s true that you will have until April 2023 to meet the deadline, but it’s always a good idea to get your money invested earlier to maximize earning opportunities.

In 2022, people under the age of 50 can contribute $6,000 to an IRA. Those ages 50 and older can contribute $7,000. 8 Maximum HSA contributions this year are $3,650 for individuals and $7,300 for families, plus a $1,000 catch-up for those ages 50 and older. 9

Tip #5: State Tax Savings Opportunities

If you desire to help your child or grandchild attend a private K-12 school or college, consider putting money in a 529 account. The benefit to contributing to a 529 plan is that the money will grow tax-free and be distributed tax-free if it’s used for qualified school or college expenses. 

If you live in Oklahoma, you can lower your state tax bill with contributions to an Oklahoma 529 Plan. Like IRA and HSA accounts, you also have until April 2023 to meet the tax filing deadlines for 529s, but the earlier you invest the money, the more likely you will see higher returns in the future.10

Toward a Prosperous 2023

Though the holidays can be financially stressful, you can use this time to alleviate that stress with smart planning. After all, saving some money on taxes will help pay for all those gifts bought for family and friends. And with the big planning tasks out of the way, you can start formulating goals for 2023. Better yet, please keep your advisory team in the loop so we can help you achieve your goals and plan for a prosperous 2023.

Sources:

  1. https://www.schwab.com/learn/story/why-consider-roth-ira-conversion-and-how-to-do-it
  2. https://www.irs.gov/taxtopics/tc409
  3. https://www.schwab.com/learn/story/primer-on-wash-sales
  4. https://www.fidelity.com/viewpoints/personal-finance/tax-loss-harvesting#:~:text=Tax%2Dloss%20harvesting%20allows%20you,invested%20and%20working%20for%20you.
  5. https://www.nerdwallet.com/article/taxes/donor-advised-funds
  6. https://www.irs.gov/newsroom/seniors-can-reduce-their-tax-burden-by-donating-to-charity-through-their-ira
  7. https://www.irs.gov/retirement-plans/plan-participant-employee/retirement-topics-401k-and-profit-sharing-plan-contribution-limits
  8. https://www.irs.gov/retirement-plans/plan-participant-employee/retirement-topics-ira-contribution-limits#:~:text=For%202022%2C%202021%2C%202020%20and,taxable%20compensation%20for%20the%20year
  9. https://www.irs.gov/pub/irs-pdf/p969.pdf
  10. https://www.savingforcollege.com/529-plans/oklahoma/oklahoma-college-savings-plan

The content of this article is developed from sources believed to provide accurate information. The information is not intended as tax or legal advice. Please consult legal or tax professionals for specific information regarding your individual situation. All expressions of opinion are subject to change. This content is distributed for informational purposes only, and is not to be construed as an offer, solicitation, recommendation, or endorsement of any particular security, products or services. Past performance is not a guarantee of future results. Index performance does not reflect the expenses associated with the management of an actual portfolio.

Castlepoint Wealth Advisors | Oklahoma Wealth Advisors | Kendall King - Founder & CEO

Kendall King, CFP®, AEP®

Founder & CEO of Castlepoint Wealth Advisors

Kendall is the Founder and CEO of Castlepoint Wealth Advisors, an Independent Wealth Management firm in Oklahoma City. He is responsible for the strategic direction and vision of the firm, and serves as lead advisor to a diverse group of clients, with special focus on entrepreneurs. With more than 18 years experience in advising clients on a wide range of wealth management topics, Kendall possesses extensive expertise and specialized knowledge regarding IRA and retirement planning topics.

Read more Kendall’s Counsel blog posts and articles.