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Left hand writing a year-end financial checklist on paper - Year End Tax Planning.

Year End Tax Planning Issues

Time flies! As the year winds down and holiday cheer takes hold, don’t let tax planning get lost in the shuffle. With the calendar approaching 2023, several opportunities arise to minimize your tax burden for both this year and the next. Here are some last-minute moves you can make to maximize your tax savings:

Maximize Retirement Savings and Education Credits

  • Boost Your Retirement Contributions: Contribute the maximum to your employer-sponsored retirement plan like a 401(k) or IRA. This reduces your taxable income for 2022 and grows your nest egg tax-deferred. Remember, the 2022 maximum for 401(k)s is $22,500 ($30,000 if you’re 50 or older) and $6,000 for IRAs ($7,000 if 50 or older).
  • Prepay Education Expenses: If you qualify for education tax credits like the American Opportunity or Lifetime Learning credits, prepay tuition for 2023 courses starting before March. This increases your credit for 2022, especially beneficial for students with limited 2022 tuition expenses.

Healthcare and Financial Strategies

  • Maximize Health Savings Accounts (HSAs): If you become eligible for HSA contributions late this year, make a full year’s worth, even if you weren’t eligible the entire year. Contributions are deductible, earnings grow tax-deferred, and qualified medical expense distributions are tax-free.
  • Employer Health Flexible Spending Accounts (FSAs): Increase your contribution for next year if you underestimated expenses this year. Remember, feminine hygiene products and COVID PPE are now eligible. The 2022 maximum is $2,850, with a $570 carry-over to 2023 (usable in the first 2.5 months).

Capital Gains and Tax Planning

  • Harvest Capital Losses: Review your portfolio and consider selling losing investments to offset capital gains, potentially lowering your tax bill. Remember, capital losses can also offset up to $3,000 of ordinary income.
  • Take Advantage of the Zero Capital Gains Rate: If your taxable income falls below the 15% capital gains tax threshold (starts at $83,351 for married filing jointly), consider selling some appreciated securities held for over a year to pay little to no tax on the gain.

Business-Specific Strategies

  • Make Last-Minute Business Purchases: Deduct year-end business purchases like equipment, tools, or vehicles using bonus depreciation or Sec. 179 expensing. Ensure the item is placed in service by December 31st.
  • Prepay State Income and 2023 Property Taxes: Increase your state income tax withholding or pay your 4th-quarter estimated state tax installment in December to increase your 2022 deductions. Prepay your first 2023 property installment in 2022 for the same benefit. Remember the $10,000 SALT limit.

Charitable Giving and Other Strategies

  • Boost Charitable Deductions: Consider bunching your planned charitable donations in 2022 if you itemize deductions and alternate between itemizing and taking the standard deduction. This can significantly increase your deduction for the year you itemize.
  • Qualified Charitable Distributions (QCDs): If you’re 70½ or older, consider transferring up to $100,000 from your IRA directly to a qualified charity. This reduces your taxable income and can potentially lower your Social Security tax burden.
  • Pay Outstanding Medical or Dental Bills: If you itemize deductions and haven’t reached the 7.5% of AGI threshold for medical expenses, consider paying outstanding bills before year-end to reach it. Look at potential future expenses for additional deductions.
  • Remember the Annual Gift Tax Exemption: You can gift up to $16,000 per person without incurring gift taxes or filing requirements. This can be a tax-efficient way to transfer wealth.

Avoid Penalties and Plan Ahead

  • Avoid Underpayment Penalties: If you think your 2022 taxes are insufficient, increase your year-end withholding to avoid underpayment penalties.
  • Disaster Loss Planning: If you experienced a federally declared disaster like Hurricane Fiona or the Western wildfires, you can claim losses on your current or prior year’s return, whichever provides the greater benefit.
  • Divorced or Separated: Consider filing jointly or separately, claiming dependents, and allocating income and deductions strategically based on your specific situation.

Seek Professional Advice: Remember, every taxpayer’s situation is unique. While these last-minute moves can offer significant tax savings, consulting an experienced tax professional is crucial to ensure the strategies align with your individual circumstances and maximize your financial benefit. Don’t let the clock tick down on tax-saving opportunities – get in touch with a qualified advisor today to navigate the year-end tax landscape and optimize your 2022 and 2023 tax obligations. Remember, a proactive approach to tax planning can save you money and minimize stress when April rolls around!

JS Morlu LLC is a top-tier accounting firm based in Woodbridge, Virginia, with a team of highly experienced and qualified CPAs and business advisors. We are dedicated to providing comprehensive accounting, tax, and business advisory services to clients throughout the Washington, D.C. Metro Area and the surrounding regions. With over a decade of experience, we have cultivated a deep understanding of our clients’ needs and aspirations. We recognize that our clients seek more than just value-added accounting services; they seek a trusted partner who can guide them towards achieving their business goals and personal financial well-being.
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