The 2023 tax season is already looking stressful, with theand the agency warning Americans that . But taxpayers can set themselves up for a relatively painless filing by taking a few steps before the end of the year.
Putting money toward retirement, cleaning up investment accounts and doing a quick check to make sure all your income is accounted for can go a long way toward reducing nasty surprises when it comes time to file.
Here are the top last-minute financial moves advisers recommend.
Boost your retirement contributions
If you have access to a tax-deferred retirement account, like a 401(k), 403(b) or traditional IRA, consider boosting your contributions in the last weeks of the year. Every dollar you put toward retirement lowers your current income, reducing the amount of money on which you’ll be taxed.
The most you can contribute to a 401(k) this year is $20,500 if you’re 49 or younger, or $26,500 if you’re 50 or older. If you’ve contributed less than that, consider putting all or most of your last paycheck into your retirement fund.
“One common mistake is forgetting that people over 50 are permitted to make top-up contributions in most of these plans. Another common error is when people switch jobs midyear and don’t double-check whether their combined contributions reach the annual max,” said Alina Fisch, a chartered financial adviser based in New York.
People with IRAs can contribute up to $6,000, with some restrictions based on their income and access to other retirement plans. Taxpayers also have more time to take advantage of this strategy. You can contribute to an IRA until the tax filing deadline and still get the tax savings for 2022.
Max out contributions to health savings accounts
Like a 401(k), a health savings account takes money out of your paycheck pre-tax, with the requirement that you spend it on health care costs. Anyone with a high health insurance deductible — defined as $1,400 or over for a single person or $2,800 for a family — can open an HSA, and there’s no time limit to use the money (unlike with a Flexible Spending Account).
For those who buy health insurance from an Affordable Care Act marketplace, “It’s not too late to open and fund an HSA,” noted Chris Diodato, a financial planner based in Palm Beach Gardens, Florida. “Many banks and online brokerages offer HSAs, and you can contribute and deduct $3,650 [from your taxes] if you’re just insuring yourself and $7,300 if you’re on a family plan,” Diodato said.
Although many marketplace plans are HSA-eligible, they won’t automatically open an HSA account when a patient signs up for the health insurance plans, which is why marketplace shoppers should be sure to take a second look, Diodato said.
Check your stocks
If you have a brokerage account, consider liquidating investments that have declined in value. A capital-gains loss of up to $3,000 can be used to offset investments that earned you income — or money from a job.
“Tax-loss harvesting can be a great opportunity to adjust your portfolio while receiving a tax benefit,” said Cody Lachner, a financial planner based in Indianapolis. “Ask yourself, ‘do these investments still fit with my overall strategy?’ If not, selling those investments may be beneficial,” he said.
Also consider jettisoning actively managed funds, said Bryan Minogue, a financial planner based in Madison, Wisconsin.
“These funds often kick out capital gains distributions to fund-holders, even if you didn’t make any trades!” Minogue said in an email. “In down years like 2022, it’s a bit of a gut punch to have your investments down and still get a taxable distribution from your funds.”
Selling these funds at a loss can help investors avoid those capital gains distributions — typically paid out in December — while using the loss to offset other income, he noted.
Check that you’re paying enough tax
If your income is on the high side, make sure that you’re paying enough tax into the system. Financial adviser Natalie Slagle said her clients who earn more than about $200,000 find that paycheck withholding doesn’t cover their entire tax liability.
Paying taxes on time is actually a money-saver because the IRS will charge people an underpayment penalty if they fall far short in their payments, Slagle said.
People who have second jobs or make money online are also more likely to face a surprise tax bill, as are people who are paid in stock. That’s because stock grants don’t always have tax withheld when they’re awarded.
There are two reasons to do accounting early, Slagle said. “One is to avoid the underpayment penalty; the other is just to plan, how do I make that bill.”
She added, “If I have an obligation to pay something, like my taxes, I want to know what it is as soon as possible. If I wait to file until the end of March and find out I need to fork over three grand, that money might not be available.”
Curious taxpayers can use the IRS’ Tax Withholding Estimator to see if they’ve had enough money taken out of their paycheck. The tool asks about wages and other sources of income, such as alimony and investments income.
Donate for the sake of donating
With year’s end also being “giving season,” many taxpayers give to charities or donate household goods, or even stock, as another way of lowering their tax liability. While this is a standard move, tax pros caution against charitable giving if your only intent is to lower your tax bill.
The main reason: You’ll only get a tax deduction for giving to charity if you itemize, which the vast majority of Americans don’t. (This longtime rule was amended during the pandemic but is back in effect for the upcoming tax season.)
“Even a thousand-dollar charitable deduction is likely not enough to make you itemize rather than taking the standard deduction,” Slagle said.
Her advice: “Donate to donate — don’t donate for the tax deduction. If it’s something you want to do, do it, regardless if you’ll benefit from a tax perspective.”
Denial of responsibility! galaxyconcerns is an automatic aggregator around the global media. All the content are available free on Internet. We have just arranged it in one platform for educational purpose only. In each content, the hyperlink to the primary source is specified. All trademarks belong to their rightful owners, all materials to their authors. If you are the owner of the content and do not want us to publish your materials on our website, please contact us by email – [email protected]. The content will be deleted within 24 hours.