Planning Ahead 2022: Smart Tax Moves before Filing in 2022

As we move into 2022, one of the first things on the financial calendar is tax season for filing your 2021 taxes. The IRS will accept tax returns for the 2021 tax year starting on January 31, 2022. The rules may vary for your state tax return so be sure to check if you are looking to file as early as possible.

Getting Prepared

Before filing your taxes, it’s important to gather all relevant documents and information that you or your tax professional will need. Depending upon your situation, this might include:

  • W-2s for any wages earned.
  • Payments received from clients, you should receive a 1099 form, if you own a business or are self-employed.
  • Statements from your brokerage accounts detailing all transactions for the year, including gains and losses on the sales of stocks, ETFs and other holdings.
  • A statement detailing interest paid on your mortgage if applicable.
  • Receipts from any charitable contributions you made during the year.

These and a variety of other documents, based on your circumstances, will give you a complete picture of your income and expenses for the year.

How to Decrease Your Tax Liability

Tax filing season is a good time to look ahead at ways to decrease your tax liability.

One tactic to reduce taxes is to contribute to retirement plans such as IRAs and 401(k)s. Paul Delzio – Managing Director, Investments for Wedbush says, “Consistently contributing the maximum amount each year to your IRA (deadline is the tax filing date for the prior tax year) and your 401(k) (deadline is December 31 each year) provides assured success towards significant long-term wealth accumulation.”

Contributions may be eligible to be made on a pre-tax basis, and the earnings in the account grow tax-deferred until withdrawn in retirement.

If you have access to a high deductible health insurance plan, consider going this route and contributing to a health savings account (HSA). Delzio says, “HSAs are the only triple-tax deductible programs available to most individuals: Tax deductible contributions, tax-deferred growth and tax-free distributions when used on broad medical related expenses. Furthermore, HSA accounts do not have to be used in the current year. Smart long-term investors let their HSA accounts grow each year into very large amounts to be used in their silver years of retirement.”

Charitable giving can also offer a tax break assuming you can itemize deductions. Besides a direct contribution to a charity, you can also contribute to a donor advised fund (DAF). Contributions of cash, appreciated securities and even hard assets like real estate and artwork can be made. The DAF invests your contributions and gifts to accredited charities can be made over time.

Stimulus and Child Tax Credits

The final round of economic stimulus payments went out in March of 2021. Some eligible taxpayers may have received less than the full amount they were due since payments were based upon prior year’s income. They may be able to claim a credit for the amount not received on their 2021 return.

Child tax credit payments began going out in July, these were also based on prior year’s tax returns as well. In some cases, taxpayers may have received more than they were entitled to or less. It’s important to review this prior to filing your 2021 return to ensure this is accounted for correctly. This may result in a payment being due, or an additional credit amount on your 2021 return.

How Can a Financial Advisor Help You?

Delzio says, “Your Financial Advisor can work with you before the end of each year to capture any investment losses that will offset investment gains, incomes and dividends in your taxable portfolios. This is called ‘tax-loss harvesting’ and will help manage your taxable exposure.”

Your financial advisor can use tax-loss harvesting and other strategies to help you manage your investments in a tax-efficient manner. Tactics such as asset location whereby assets that are less tax-efficient are held inside of retirement accounts such as IRAs and 401(k)s, and more tax-efficient investments are held in taxable accounts can save investors quite a bit in taxes over a period of years.

Tax planning is an ongoing process and your Wedbush advisor can help you position your portfolio in the most tax-efficient fashion that is consistent with your overall financial goals, even as they might evolve over time.

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These materials are provided for general information and educational purposes based upon publicly available information from sources believed to be reliable — we cannot assure the accuracy or completeness of these materials. The information presented is not intended to constitute an investment recommendation for, or advice to, any specific person. The information presented here is not specific to any individual’s personal circumstances. To the extent that this material concerns tax matters, it is not intended or written to be used, and cannot be used, by a taxpayer for the purpose of avoiding penalties that may be imposed by law. Each taxpayer should seek independent advice from a tax professional based on his or her individual circumstances. The information in these materials may change at any time and without notice.