Ringing in 2023 on a sound tax footing

The financial climate during 2022 was active, volatile and unpredictable. But market declines can be a good thing when you”™re looking to create opportunities to balance your portfolio. If you want to capitalize on the down market, it”™s a good idea to start with an analysis of your financial situation that takes in a variety of considerations to determine a strategy to pay the right amount of taxes and possibly save money in the process. With fourth-quarter estimated taxes due Jan. 17, Ben”¯Soccodato”¯and”¯Chris Kampitsis”¯of The SKG Team at Barnum Financial Group”¯ in Elmsford said there”™s still time to consider some year-end tax strategies to help mitigate your tax responsibility: 

Tax-loss harvesting 

The main goal of tax-loss harvesting is to defer income taxes years into the future, ideally when you retire and are presumably in a lower tax bracket. The strategy dictates you sell investment assets like stocks, bonds and mutual funds at a loss to lower your tax liability ”” which shouldn”™t be too hard in a down year like 2022. When your capital losses are more than your gains, the IRS allows you to apply up to $3,000 in losses against your taxable income. Plus, you can carry over the remaining losses to offset income in future years. 

Retirement-account contributions 

Another strategy is to maximize your employer contributions to your retirement accounts, such as 401(k), Traditional IRA, Roth IRA and Health Savings Accounts (HSA). For this current tax year, the maximum allowable 401(k) contributions are $20,500 up to age 49 and $27,000 for ages 50-plus along with a $6,500 catch-up contribution. The maximum IRA contributions are $6,000 up to age 49 and $7,000 for ages 50-plus along with a $1,000 catchup contribution. If you own an HSA, you may want to consider maxing out contributions as well ”” $7,300 for families, $3,650 for individuals and an additional $1,000 for individuals ages 55-plus. 

It”™s also important to note that in some states you can contribute a certain amount to your 529 plans for college and you”™ll qualify for a tax deduction. So it”™s not only retirement accounts that may provide you with tax mitigation tools. 

Required minimum distributions (RMDs) 

Traditional IRAs, SIMPLE IRAs (Savings Incentive Match Plans For Employees) and SEPs (Simplified Employee Pensions) mandate RMDs on April 1”¯the year following your 72nd”¯birthday. To avoid a penalty, you need to take your RMD by Dec. 31. If you don”™t take your required minimum distribution by New Year”™s Eve, you will face a 50% excise tax on the withdrawal amount based on your age, life expectancy and beginning-of-year balance. If you don”™t need the cash flow, consider a Qualified Charitable Distribution (QCD) pulled directly from your retirement account to a public charity of your choosing. Also, this will help keep your taxable income low. 

Roth IRA conversion 

This is a great way to save money in the long run, especially in this current climate. The conversion is considered a taxable event and any pretax contributions and earnings converted to a Roth IRA are added to your gross income and taxed as regular income. But earnings and contributions within the account grow tax-free and once an account has been opened for five years, when you reach the age 59½, you”™re able to withdraw funds penalty-free. 

Bunch itemized deductions 

There are certain expense categories that the IRS will allow you to classify as”¯itemized”¯deductions. They are medical and dental, deductible taxes, qualified mortgage interest (including points for buyers), investment interest on net investment income, charitable contributions and casualty, disaster and theft losses. These expenses can only be itemized if they”™re higher than a certain percentage of your AGI ”” Adjusted Gross Income. For”¯2022 taxes, single filers may claim a $12,950 standard deduction, while married couples filing jointly can claim a $25,900 standard deduction. 

Charitable donations 

There are plenty of charitable organizations doing great work that could use your financial help. Find a charity that aligns with your beliefs and take advantage of the tax break afforded.”¯For 2022, deduction limits for charitable gifts are 30% of adjusted gross income (AGI) for contributions of noncash assets, if held more than one year, and 60% of AGI for contributions of cash. There”™s also the option of donor advised funds. This concept, which is becoming increasingly popular, allows you to group multiple years donations into one lump sum contribution ”” an effective strategy during years of a large financial windfall, such as a bonus or an inheritance. The large, grouped contribution also provides the added benefit of a bigger tax deduction. 

Flexible Spending Accounts (FSAs)”¯ 

Most FSAs are bank accounts created specifically for health-care costs, but there are also Dependent Care FSAs, which are designed for childcare and adult-care services. These accounts contain pretax dollars for medical expenses, which would help lower your taxable income. Before the end of the year, it”™s important to spend any extra funds within the account. Schedule any checkups needed. Make sure your prescriptions are filled. Any money leftover in the account after Dec. 31”¯will be taxed and, unless your employer allows a certain amount to rollover into the following year, you”™ll lose these funds forever. 

Rebalance your portfolio 

Many people target the end of the year to review the current asset allocation of their investment portfolios. Over the course of a year, the market value of each security you hold earns a different return, often causing the weighting of each asset class to change. You want to make sure that your portfolio stays on or close to the asset allocation strategy that best aligns with your goals, time horizon and tolerance for risk. This is true for IRAs, 401(k)s and nonqualified investment accounts. A financial professional can help you look at your entire picture to determine if any changes should be made. 

Remember, it”™s important to speak with a tax professional to answer any lingering questions you make have about any tax consequences deriving from the above options.