November 29, 2022

There are several year-end tax tips to keep in mind. These include:

1. Maximize annual retirement plan contributions.

Tax-advantaged retirement accounts are funded with pre-tax dollars and compound over time. You may make pre-tax contributions to a 401(k) up to $20,500 if you are under 50 and $27,000 for those 50 and over. If it is not possible to contribute the maximum amount, you can try to contribute any amount matched by your employer. The maximum yearly contribution for an Individual Retirement Account (IRA) is $6,000 (under age 50) and $7,000 (50 and over).

2. Spend Flexible Savings Account (FSA) dollars and contribute to Health Savings Accounts (HSA’s).

n FSA is a pre-tax bank account for out-of-pocket healthcare costs and is subject to taxation if funds are not used during the year—so spend any leftover funds in your FSA by year-end. The maximum yearly contribution for an HSA is $3,650 for individuals and double that for families, with an extra $1,000 for individuals aged 55 and over. HSA’s may be funded up until April 2023.

3. Assess marginal and capital gains tax matters.

If you plan to sell securities this year, plan to do so by December 30 to realize a capital gain or loss. If you sell before year-end, you may be able to deduct investment losses to offset gains. Short-term capital gains can potentially push you into a higher marginal tax bracket; so assess decisions accordingly.

4. Review and re-balance portfolios.

As you evaluate your portfolio, it may be wise to practice tax loss harvesting, or the sell-off of underperforming investments in order to reduce taxable capital gains. Additionally, it might be beneficial to convert your traditional IRA to a Roth IRA. You can transfer pre-tax IRA money to an after-tax Roth IRA for tax-free future growth, although you will pay upfront taxes on the amount transferred. Be sure to maintain diversity in your portfolio.

5. Plan for estimated taxes and Required Minimum Distributions (RMD’s).

RMD’s from 401(k)’s and IRAs are considered taxable income and are mandatory after age 72. If you neglect to take the required RMD, a tax penalty is incurred. If you are philanthropically inclined and prefer not to increase your taxable income, a Qualified Charitable Deduction (QCD) may be worth considering.

6. Tap into the tax benefits of charitable giving.

In place of cash, think about giving appreciated securities or qualified IRA distributions to a public charity in order to increase your tax benefit.

7. Prepare a strategy for stock options.

Determine whether you want to exercise or disqualify company-granted stock options. If you sell the options, a capital gain or loss will be realized, depending on the length of time they were held.

8. Evaluate estate plans and gifting.

A gift of up to $16,000 is permitted this year without tax or reporting requirements. The amount may also be gifted in appreciated securities to a recipient in a lower tax bracket to save additional tax dollars. The basic exclusion for estate tax is $12,060,000.

9. Get ready to repay student loans.

Federal student loan payments will resume on January 1, 2023.

On a positive note, the IRS has recently announced a “gift” to tax payers for the 2023 tax year intended to combat inflation, including a 7% increase in income tax bracket thresholds across the board. For the immediate future, however, you can act now to safeguard your assets through proactive tax planning. Your financial advisor has the knowledge and tools to help you navigate the best course of action to lessen your tax burden and optimize your financial position.

The information provided here is not investment, tax or financial advice. You should consult with a licensed professional for advice concerning your specific situation.

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