The end of the year is fast approaching and that means tax season will soon be here. Though tax planning and preparation might be the last thing on your mind due to the holiday rush upon us. Nevertheless, if you spare a little time to plan your finances and taxes, it will do you a lot of good in the coming year. According to tax preparation professionals in Honolulu, prompt and early tax planning can help you prevent mistakes with your tax filing in the new year.
In light of this, here are some helpful tax planning ideas that can save you from unnecessary financial issues.
Tax-Loss Harvesting
Tax-loss harvesting is a strategy that can be used to reduce the tax liability of an investor. It involves selling off taxable investments such as stocks, mutual funds, EFT, or bonds that have declined in value. As we know that almost all taxable investment in the current year, 2022 has dropped in value, so now is the perfect time to sell some of them. However, before you sell your taxable investment, take some time to analyze all the investments and find out about their prospects in the coming year and beyond. This will help you weigh their short-term losses and long-term losses. Once you’ve done this, you can then sell off the ones with short-term losses as they are more beneficial for offsetting short-term gains, which are always taxed higher.
Charitable Giving
As regards charitable giving, if you choose to make donations to an organization that advocates or supports a cause you’re concerned about, it could help to clear off the taxes you’re supposed to pay. If it doesn’t completely clear off your payable tax, it’ll significantly reduce your payable tax for the concluding year. But, there’s a catch, you need to make the charitable donation before the last day of the concluding year. You could combine tax-loss harvesting with charitable donations, these two tax reduction strategies go well together.
Increase Your 401(k) Contributions
The 401(k) contribution is a retirement savings plan that employees can invest in. It is an employer-sponsored plan where the employee decides how much they want to contribute to it. The contributions are then invested in the 401(k) account which can be used for retirement. Since the contribution is for retirement, it’s not taxable, hence, making it a suitable way of avoiding taxes. Thankfully, most employers allow employees to increase or decrease their 401(k) contributions at any time. When you increase your 401(k) contributions, you’re in turn decreasing your taxable income.
In 2022, employees are permitted to increase their 401(k) contributions by up to $20,500, and if you’re above age 50, you are allowed to increase your contribution by $27,000. However, for this tax reduction technique to be effective, make sure to increase your contribution before December 31.
Flexible Spending Account (FSA) Funds
Flexible spending accounts are a type of medical expense account. They allow employees to set aside money from their paychecks before taxes to pay for qualified expenses. The money is not taxed and it can be used to pay for child care, out-of-pocket medical expenses, and other qualified expenses. However, yearly FSA funds do not roll over to the coming year; in other words, if you don’t use it in 2022, you’ll lose it in 2023. Also, if you don’t spend the untaxed FSA, you’ll lose its tax benefits as well as the funds.
Therefore, make sure to submit the list of your FSA expenses before the last day of the year.
Roth IRA Conversion
Roth IRAs are one of the most popular retirement investment vehicles. They are tax-advantaged retirement accounts that can be used to save for retirement. Roth IRA is a type of individual retirement account (IRA) that is funded with post-tax dollars and offers tax-free growth and tax-free withdrawals.
A Roth IRA differs from a traditional IRA in two major ways:
- Contributions to a Roth IRA are not tax deductible, but earnings grow on a tax-deferred basis. Withdrawals, including earnings, are generally tax-free (provided certain conditions are met).
- Unlike contributions to traditional IRAs, contributions to a Roth IRA may be withdrawn at any time without penalty.
To enjoy the tax benefits of a Roth IRA, you can convert your traditional IRA to Roth IRA. You can still do your Roth IRA conversion before the year ends; the conversion process will help reduce your taxes.
In conclusion, endeavor to spend some time analyzing the tax planning ideas in this article and thereafter choose the one that fits your situation.
