Most people don’t enjoy learning or thinking about taxes, but tax planning is one of the most underrated areas that can have the greatest impact on your overall financial health. The end of the year is a great time to review your tax strategy and identify opportunities that may save you on your tax bill.
Below is a list of six common tax planning opportunities to be aware of.
BOOST RETIREMENT SAVINGS and REDUCE TAXES
It is normal for many employers to pay out bonuses in December. If you’re in this type of situation, it’s a great opportunity to boost your retirement savings. The 401k/403b contribution limit for 2022 is $20,500 or $27,000 if over age 50. If you know you are receiving a year-end bonus, most employers will allow you to change your contribution percentage to defer more of the bonus into your retirement account. Our philosophy is to refrain from using bonuses as part of a regular budget, and to use them to enhance savings or pay down debt instead.
Tax-loss harvesting is the process of realizing a loss on an investment and reinvesting the proceeds into a similar investment. The investment can’t be identical or you run afoul of wash-sale rules, which negates the ability to realize the loss. Up to $3,000 of losses can be realized in a year to offset ordinary income, and any remaining losses can be carried forward to the next year to offset future capital gains and income. With both stocks and bonds having a bad year in 2022, there is large opportunity to tax-loss harvest across a broad range of asset classes.
If you already have an HSA plan, or recently switched to an HSA plan during open enrollment, the end of the year can be a great time to jump start your HSA savings. A family can still contribute the maximum HSA amount of $7,300 for 2022, even if only one spouse was covered under an HSA plan for the year. HSA plans have the benefit of being triple tax-free, meaning contributions go in pre-tax and any growth or distributions come out tax-free as long as the distributions are used for qualified medical expenses. We talked more in depth about HSA plans in a blog post from our last monthly newsletter.
In a year where most financial markets and investment portfolios are negative, it can be a perfect opportunity to complete Roth conversions. This is the process of taking pre-tax IRA or 401k money/assets and converting it to a Roth account. You pay ordinary income taxes on any pre-tax money that is converted, but any future growth on the money will be tax-free once converted to the Roth account. With markets being negative for the year, it provides the opportunity to convert assets that have a higher probability to appreciate in the future. This can be especially impactful if you are in a low tax bracket for 2022 and expect your income to increase in the future, which might limit the effectiveness of the strategy moving forward.
For solopreneurs or those with 1099 income, a Solo 401k can be a great option to both boost retirement savings and reduce taxes. The Solo 401k has the same contribution limits as a regular 401k plan, but is limited to businesses with no employees or only the business owner and spouse. Between employee and employer contributions it is possible to put away up to $61,000 for 2022. A Solo 401k must be established by the end of the year to be able to make contributions for 2022. Many people don’t realize they can still fund a Solo 401k even if they are covered by another 401k plan through their employer as long as they have 1099 income. The $61k maximum employee/employer contribution limit is still the same if covered by more than one plan. I was able to utilize this strategy when I had both W2 and 1099 income at my former job.
SMALL Business EQUIPMENT DEDUCTIONS
If you are a small business owner and know you need new equipment or a vehicle heading into 2023, December can be a perfect time to make the purchase. Certain assets still have the potential for 100% bonus depreciation from the Tax Cuts and Jobs Act (TCJA) bill that was passed in 2017. This allows for possibility of higher deductions on new business equipment or vehicles that are placed in to use before the end of 2022. I had the ability to capitalize on the vehicle deduction in 2018 when I purchased a car for business use. To capitalize on the 100% bonus depreciation, the vehicle needed to have over a 6000 pound Gross Vehicle Weight Rating (GVWR), hence how I ended up with a Jeep Grand Cherokee.
CONSULT A CPA
Zizzi Investments is not a CPA firm, and we recommend consulting a CPA or tax adviser before executing on any tax planning opportunities. If you are looking for a CPA firm, we are happy to help with an introduction.
Happy planning and enjoy the holidays!