The last weeks of the year are jam-packed with familial obligations and holiday festivities. But in between the eggnog and gift-wrapping, it’s important to make room for your financial planning.
Tax planning and financial planning go hand in hand. When you combine the two with the help of qualified professionals, you can save money and cut down on tax-related costs.
To help you begin 2023 with your taxes in tip-top shape, we’ve outlined seven year-end tax planning questions for your consideration.
7 Year-end Tax Planning Questions
Follow these year-end tax planning tips to start your 2023 financial planning on the right foot.
1. Do you expect your income to increase or decrease in the future?
If you foresee a raise heading your way soon, there are some tax strategies you can use to minimize your future tax liability, including:
- Make Roth IRA and Roth 401(k) contributions and Roth conversions.
- If offered by your employer plan, consider making after-tax 401(k) contributions.
- If you are age 59.5 or over, consider accelerating traditional IRA withdrawals to fill up lower tax brackets.
On the opposite end of the spectrum, if you think your income might lower, you could consider strategies to minimize your tax liability now, such as traditional IRA and 401(k) contributions instead of contributions to Roth accounts.
2. Do you own your own business?
If so, consider the following:
- If you own a pass-through business, consider the QBI Deduction eligibility rules.
- Consider the use of a Roth vs. traditional retirement plan and its potential impact on taxable income and Qualified Business Income.
- If you have business expenses, consider if it makes sense to defer or accelerate the costs to reduce overall tax liability.
- Many retirement plans must be opened before year-end (if you follow a calendar tax year).
Whether you’re running every aspect of your business or working with a growing team, these tips can help you cut tax-related costs.
3. Have you married or divorced in the past year?
Your marital status can have major impacts on your taxes. If you’re recently married, you may be filing jointly for the first time with a much higher dual income. If you’re recently divorced, your total assets may have diminished.
Talk with your advisor about how your tax liability may be impacted by your marital status as of December 31st.
4. Are you charitably inclined and want to reduce your taxes?
Does the holiday season have you thinking about ways to give back to your community? If so, there may be certain tax-deducting moves you can make to give back while also saving money.
For example, if you expect to take the standard deduction ($12,950 if single, $25,900 if Married-Filed-Jointly), consider bunching your charitable contributions (or contributing to a donor-advised fund) every few years which may allow itemization in specific years.
Another trick for charity lovers? Explore tax-efficient funding strategies with your advisor, such as gifting appreciated securities or making a QCD (qualified charitable distribution).
5. Do you have any capital losses for this year or carryforwards from prior years?
Capital losses may provide opportunities for offsetting gains. In fact, you may be able to take the loss or use the carryforward to reduce your ordinary income by up to $3,000!
If you invest using a robo-advisor tool such as Wealthfront, this tax-loss harvesting may have already occurred. Consult with your advisor or a tax planner to make sure you’re on the right track to optimize those losses.
6. Are you on the threshold of a tax bracket?
If you’re toeing the line between tax bracket thresholds, there are several strategies to defer income or accelerate deductions, thus managing capital gains and losses to keep you in the lower bracket.
Consider the following important tax thresholds:
- If taxable income is below $170,050 ($340,100 if MFJ), you are in the 24% percent marginal tax bracket. Taxable income in the next bracket will be taxed at 32%.
- If taxable income is above $459,750 ($517,200 if MFJ), any long-term capital gains will be taxed at the higher 20% rate.
- If your Modified Adjusted Gross Income (MAGI) is over $200,000 ($250,000 if MFJ), you may be subject to the 3.8% Net Investment Income Tax on the lesser of net investment income or the excess of MAGI over $200,000 ($250,000 if MFJ).
- If you are on Medicare, consider the impact of IRMAA surcharges by referencing the “Will I Avoid IRMAA Surcharges On Medicare Part B & Part D?” flowchart
If you’re feeling overwhelmed with all the acronyms (it’s a lot!) don’t hesitate to reach out to your tax professional or financial advisor – they can help you discover strategies that fit your unique plan.
7. Do you anticipate any significant windfalls?
Whether it’s an inheritance, work bonus or something else, the gift of extra cash can have a significant impact on your taxes. It’s a good idea to review your tax withholdings and seek professional advice on how best to move forward.
April might be the official tax season, but keeping taxes top of mind year round can help you create a more cohesive financial plan for the future.
Welcome the New Year with Clarity
We’re here to help you tackle tax planning no matter the season. Click here to connect with a member of the Clarity team today to get started.