Year-End Tax Saving Strategies

2022 has certainly been a punishing year, given the high inflation, economic uncertainty, geopolitical upheaval, mid-term elections, and of course the nerve-racking volatility in financial markets. It’s understandable that you may feel less in control at times like this.  However, as we approach year-end, smart tax planning can help place you back in the driver’s seat and position you to be financially stronger for the future.  Here are four practical year-end tax savings tips to help you make the most of the situation and regain some financial control over your life.

• Max Out Your Workplace Retirement Savings Plan. Assuming you have available cash flow (after paying your bills and setting aside ample emergency cash reserve), you may be able to contribute more from your paycheck to your workplace retirement savings plan (403b or 401k, for example). As a matter of fact, in 2022, you can contribute up to $20,500, plus another $6,500 “catch up” if you are 50 or older.  Your pre-tax contributions will provide upfront tax benefit by lowering your tax bill for the contribution year. And, if instead, you contribute to a Roth retirement plan, the tax benefit will be harvested later down the line as qualified distributions come out tax free. So, take advantage of the generous contribution cap as much as possible before the year is up.
• Max Out Your IRA. Depending on whether you (and your spouse if you are married) contribute to a workplace retirement plan, and on your household income level, you may be able to contribute up to $6,000 per year in 2022 (plus another $1,000 “catch up” if age 50 or older) to your personal IRA. This applies to either a tax-deductible pre-tax contribution to a Traditional IRA or an after-tax contribution to a Roth IRA. This contribution limit is separate from the workplace retirement savings limit. But the tax benefits are similar. In addition, you have an extended timeframe to contribute to your IRA - until the tax filing deadline of April 15, 2023.  And for those taxpayers looking to sock away even more money immediately, they can also make contributions for the 2023 tax year as soon as January 1^st 2023, rolls around. But first, make sure you have the appropriate earned income and are aware of the contribution and tax rules, which can be complicated. Check with a financial planner or a tax advisor before making your contribution. 

• Make a Qualified Charitable Distribution (QCD). Individuals who are 70 ½ or older can transfer, tax-free, up to $100,000 from a Traditional IRA directly to a 501(c)(3) charity - except to a Donor Advised Fund or Private Foundation. The key is to make the transfer directly from the IRA custodian to the charity, bypassing your hands entirely; the distribution cannot be made out to you - it must go out directly to the charity. This strategy is for the philanthropic taxpayer looking to reap tax benefits from the donation and does not require the taxpayer to itemize.  So, for taxpayers who must take annual required minimum distributions (RMDs), such as someone 72 or older, this strategy provides great tax savings.  First of all, the distribution counts toward the RMD.  But unlike a typical RMD, because the distribution is a charitable donation, it is excluded from taxes (a typical RMD is subject to ordinary income tax). This benefit can be especially meaningful for senior taxpayers looking to stay under the income threshold to avoid higher Medicare premiums or more taxes on their Social Security benefits. QCD has the potential to significantly reduce your income tax and can be a win-win for both the charity and your wallet. Note, QCD can be made from any IRA (but not workplace retirement plans like 403b’s and 401k’s).
• Take Advantage of the “Energy Efficient Home Improvement Credit” for Clean Energy Home Improvements. The 2022 Inflation Reduction Act also provides a tax credit (“Energy Efficient Home Improvement Credit”) to homeowners for clean energy improvements. The scope of qualified improvements is wide and generous, including insulation, windows, doors, basic weatherization, HVAC systems, electric heat pumps, water heaters, water boilers, skylights, solar panels, and energy audits.  This new tax credit replaces the old credit which had a $500 lifetime limit and expired after 2021.  Congress has revived the credit and made it bigger and sweeter, along with a new name. This new tax credit has a $1,200 per year limit (not lifetime). And it will be available for the next 10 years, through 2032. So, if you were looking to fix up your home, the government has just given you more reason to make it energy efficient!

The key takeaway is that, despite the difficult year, smart year-end tax maneuvers can help us generate meaningful savings and better position our finances for tomorrow! Consider these four tax-savings strategies for your life!

The information contained herein is for informational purposes only.  While MMBB made every attempt to ensure that the information is accurate, MMBB is not responsible for any errors or omissions or the results obtained from the use of this information.  MMBB is not liable for any success or failure that is directly or indirectly related to the use of the information contained herein.  The information contained herein does not constitute any financial, insurance, investment, legal, or tax advice.  In no event shall, MMBB and/or its fiduciaries, directors, officers, employees, or agents thereof be liable for any special, direct, indirect, consequential, or incidental damages or any damages whatsoever, whether in action of contract, negligence or tort, arising out of or in connection with the use of the information contained herein.