As we enter December, the time to make moves to potentially reduce our taxes for 2022 is growing short. There still are a number of things you can do in this last month of the year to lower your tax bill. Note that the deadline for most of these moves is December 31st.
Maximize retirement plan contributions
For those with a 401(k) plan or a similar company-sponsored retirement plan, you can contribute up to $20,500, with an extra catch-up contribution of $6,500 if you are 50 or over. Try to maximize pre-tax contributions into a traditional 401(k) or similar account before year-end if possible.
For those who can make pre-tax contributions to an IRA, the maximum contribution for the 2022 tax year is $6,000, with an additional $1,000 catch-up contribution for those who are 50 or over. The deadline for 2022 contributions is April 17, 2023.
Charitable contributions offer the benefit of doing good for others and, in many cases, also provide a tax benefit. There are a number of ways to make charitable contributions.
● Cash contributions made to a qualifying charitable organization can be used as a deduction up to 60% of your adjusted gross income (AGI) for those who can itemize. Unused deductions can be carried forward to subsequent tax years.
● Appreciated securities can be used to make donations to organizations that will accept this form of contribution. The market value of the securities can be used as a tax deduction. Additionally, there are no capital gains taxes due since the securities are not being sold.
● For those who are at least 70 ½ years of age, you can give up to $100,000 from a traditional IRA as a donation to a qualified charity. These contributions are called qualified charitable donations, or QCDs. For those who are subject to required minimum distributions (RMDs), QCDs can be used to make some or all of their RMD for the year. QCDs do not qualify for a tax deduction, but the money comes out of the IRA tax-free. To the extent any of the QCDs are used as part of your RMD for the year, this is a way to reduce or eliminate your taxes on the RMD.
● Contribute to a donor advised fund or DAF. Contributions can be made with cash, securities or other assets such as artwork or real estate. Contributions to the DAF count towards the tax year in which they were made as a deduction, and contributions can be made to qualified charities over time.
Bunch deductions into 2022
If you will not qualify to itemize your deductions for 2022, you can try to bunch deductions from future years into 2022. For example, if you would normally have a medical procedure done in 2023, move it to 2022 if possible if this procedure will bump your medical expenses over the 7.5% of AGI threshold.
The same with charitable contributions. If you have the cash, consider making several years’ worth of contributions by the end of 2022. This can be a good tax strategy if it allows you to itemize where you otherwise would not be able to do so.
There are a number of tax credits, largely for middle- and lower-income Americans. Tax credits are superior to deductions in that they are direct reductions in your tax liability. Here are a few to keep in mind if you qualify.
● The premium tax credit is a credit available to taxpayers who purchase health insurance coverage through the Health Insurance Marketplace. The credit is subject to certain income restrictions.
● The child tax credit is available to parents of eligible dependents whose modified adjusted gross income is up to $400,000 for those filing married and joint, and up to $200,000 for single filers. The amount of the credit can be up to $2,000, of which up to $1,500 can be refundable.
● The child and dependent care tax credit provides a tax credit for parents who pay the cost of childcare for their children or other dependents. For 2022, the credit is up to 35% of up to $3,000 in expenses for one dependent or up to $6,000 in expenses for two or more children.
Changes to tax brackets for 2022
There were several changes to tax brackets and related limits for 2022 that could impact your tax liability this year.
The threshold for the standard deduction increased in 2022.
● For those filing as single or married filing separately, the standard deduction has increased to $12,950.
● For those filing as head of household, it has increased to $19,400.
● For taxpayers filing married and joint, the standard deduction has increased to $25,900.
These increases mean that the threshold for being able itemize deductions on your return has increased for 2022, making it more difficult for some to itemize deductions.
From 2021 to 2022, most tax brackets increased at the upper end for the year due to inflation. This includes the regular income tax brackets as well as those for long-term capital gains. While the tax rates did not change, this increase of the upper end of the brackets means that a taxpayer can earn a bit more income and not move up to the next bracket.
For example, the top end of the 32% tax bracket for those filing married and joint increases to $431,950 for 2022 from $418,850 for 2021. This means that you could earn an extra $13,100 and not move up to the next tax bracket in 2022.
December is a good time to discuss any year-end tax planning moves to help reduce your 2022 taxes with your Wedbush financial advisor, as well as with your tax professional.
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.