Let’s dig right in and see what tax savings tips might be available to you for 2022. Nothing wrong with being prepared ahead of time. Note that tax planning is just as important for retirement planning as it is for today’s taxes. Tax rates are historically low right now, and that is probably going to change no later than 2026. Also, retiree income is not as low as originally anticipated which is creating more of a tax burden than originally expected in retirement. The thinking on taxes in retirement has changed, and now is a great time for you learn how to mitigate taxes now and in retirement.
Tips to Curb Your 2022 Tax Bill:
If you work for an employer, and you had an unexpectedly high tax bill for 2021, now is a good time for you to change your withholdings by filing a new Form W-4 to increase the amount of taxes withheld from your paycheck. Be careful, though. Compute estimates for 2022 taxable income to determine how much you will owe in taxes. Don’t substantially pay too much to the IRS. Remember, the IRS charges you interest and penalties if you underpay your taxes, but the IRS doesn’t pay you interest if you overpay your taxes. The money you overpaid in taxes could have been invested in the stock market during the year. And 2022 is proving to be a good year to invest in the stock market!
The following tip is beneficial for small business owners. If your income is at a level where paying 2023 business expenses in 2022 makes sense, pay those expenses before year end to claim the business expense on your 2022 tax return.
Same is true for those who own rental properties. If you have home improvement projects planned in the short-term and need rental expenses to reduce taxable rental income, complete those projects prior to year-end so you can expense those eligible costs on your 2022 tax return.
No matter if you are an employee or self-employed, this tip is for those who itemize deductions rather than taking the standard deduction. If your medical expenses are high in 2022, wrap up the end of the year by scheduling appointments and procedures prior to year-end. This includes dental and vision. If you need more itemized deductions this year, consider paying property taxes early and prepay college tuition.
Contributing to a 529 college savings plan will have no impact on federal taxes due, but it could reduce your state income taxes.
Tips if You Hold Investments Outside of Retirement Accounts:
What exactly are investments outside of retirement accounts? These are your brokerage accounts with a custodian. These accounts are not your 401(k)s, Traditional IRAs nor your Roth IRAs. You paid taxes on the amounts invested in brokerage accounts. Then, year after year, you pay taxes on dividends and capital gains taxes on your investments.
Have you heard of tax loss harvesting? This is the year to learn more about tax loss harvesting if you have significant balances in your brokerage account and need tax losses to reduce your 2022 capital gains. Why? Because we are currently experiencing a market downturn in 2022. The IRS allows you to sell investments that are currently valued lower than the price you paid for the investments and use the resulting capital loss to offset capital gains tax. If no capital gains tax in the current year, you can write off $3,000 in capital losses in 2022 to offset taxable income. Be aware of wash-sale rules, though, if you are implementing a tax loss harvesting strategy.
Tips for Retirement Savings:
Now this is a tough one…. I typically tell my clients to only invest the amount needed in their 401(k)s to receive the entire company match. Because that company match is free money! But every dollar withdrawn from a 401(k) account in retirement is 100% taxable…. And if tax rates are going up soon, does it make sense for your retirement savings to be in a 100% taxable account? Well if you are looking at a hefty tax bill in 2022, then it does make sense to max out your 401(k) in 2022. Maximum contributions in 2022 total $20,500, plus $6,500 in catch up contributions if you are 50 or older. The dilemma is, do you want to pay more in taxes now while the tax rates are historically low or later in retirement when the tax rates may be much higher? One of the deciding factors is how high do you anticipate your taxable income to be in retirement. That’s why tax planning is an instrumental component of financial planning.
I’m not going to address this topic in depth because there is too much to say. I am sure you have heard that Roth IRAs have great tax benefits for retirees since you pay taxes on amounts invested in a Roth IRA and then never pay taxes again on those amounts if you follow IRS guidelines for setting up Roth IRAs. If you are not income-eligible to contribute to a Roth IRA, Roth IRA conversions are a great way to reduce taxes in retirement. You can convert your Traditional IRAs to Roth IRA to enjoy the tax benefits of Roth IRAs in retirement. Let me clarify, you must pay taxes on the amount converted from a Traditional IRA to a Roth IRA in the year of conversion. And this is a great year for conversions since stock prices are down approximately 20% year-to-date, and tax rates are historically low. So, conversions are good for those with lower incomes this year and/or those who have funds to pay the taxes outside of the IRA account if younger than 59 ½. Tax planning is instrumental to ensure you are not converting too much in one year to bump you up several tax brackets. Or even unnecessarily converting to Roth IRA when taxes in retirement are not an issue for you to retire securely.
Now I didn’t get into the finer details of the tax code in this post. If you have any questions, reach out to your CPA for additional guidance. None of this post should be construed as tax advice, and tax advice should be tailored to your individualized circumstances.
DISCLAIMERS:
All information provided by Hartmann CFO, LLC and Healthy in Retirement is intended for informational purposes only. The views expressed are personal opinions and should not be construed as financial or tax advice for your specific situation. Please make sure to do your own research or find a trusted financial professional, tax adviser or attorney before making any financial decision on your own.
Neither Hartmann CFO, LLC, Healthy in Retirement nor its owners make any representations as to the accuracy or suitability of the claims made here. Nor does Hartmann CFO, LLC, Healthy in Retirement, or its owners assume any liability regarding financial results based on the use of information provided here.