INVESTOR EDUCATION

Managing your finances | Goal priorities

Optimize Your Year-End Tax Savings

Published on December 1, 2022

Managing your finances | Goal priorities

INVESTOR EDUCATION: Investor Education | Managing your finances

Optimize Your Year-End Tax Savings

Published on December 1, 2022

As 2022 draws to a close and preparations are made for the coming year, we have compiled a list of five strategies that can assist you in maximizing your savings, minimizing your tax burden, and remaining on pace to achieve your financial objectives. This article focuses on how you can optimize your year-end tax savings.

Max out your retirement contributions for 2022

Contributions to your retirement accounts can still be made for the year 2022 if you act quickly.

You have until:

  • To make a contribution to your employer’s plan, the deadline is December 31, 2022.
  • The deadline for making contributions to regular or Roth IRAs is the tax filing date in April 2023.

Keep in mind that the maximum amount you may contribute to your IRA is determined by whichever of the following is lower:

  • your earned income for the year
  • the restrictions imposed by the IRS

You might be eligible for certain additional tax deductions right up until the deadline if you have a retirement account. Contributions to traditional employer plans are often deducted from an employee’s salary before taxes are withheld, which immediately lowers that employee’s taxable income. Contributions to IRAs are handled in a somewhat different manner. Deductions for conventional IRA contributions, on the other hand, can be rather variable depending on your modified adjusted gross income and whether or not you are covered by a retirement plan at work. Roth IRA contributions, on the other hand, are never tax deductible. Find out if you are eligible for an IRA by looking at the deduction limits for 2022.

Contribute to your 529 plan in 2022 in order to realize your educational savings objectives.

529 plans are an excellent method to offer the gift of education while also receiving favorable tax treatment for your contribution. Contributions to most states’ 529 education plans must be made by the end of the year in order for the contributor to qualify for a tax deduction or credit associated with the 529 plan. Nevertheless, until April 15 of the following year, you are able to make contributions to plans that are managed in the states of Georgia, Mississippi, Oklahoma, South Carolina, and Wisconsin. The state of Iowa will accept donations until the 30th of April in 2023.

Contributions of up to $16,000 for single filers and $32,000 for married couples filing jointly in 2022 are exempt from the federal gift tax and can be made on behalf of a recipient.

Depending on the state in which you reside, you might be able to claim a deduction or credit on your state income tax for the amount that you donate to charitable organizations.

Make the most of the tax breaks available for donations to nonprofit organizations

Giving to charity allows you to provide financial support to the causes you care about while also allowing you to take advantage of the tax benefits that come along with being kind.

Charitable deductions

For financial gifts provided to an eligible charity, you can deduct up to sixty percent of your adjusted gross income (AGI) for the year 2022 for charitable donations made by the end of the year on December 31, 2022. (which excludes private foundations, supporting organizations, or donor-advised funds). The deduction for non-cash contributions such as appreciated stock gifts and donations to eligible private foundations or organizations is typically restricted to thirty percent of the taxpayer’s adjusted gross income (AGI).

Donations to charities that meet the requirements (QCDs)

If you are at least 70 1/2 years old, you can withdraw up to $100,000 yearly from your traditional IRA and give it straight to a qualifying charity without having to pay taxes on the money. Instead, the QCD portion of your donation is simply removed from your taxable income. If you are 72 years old and don’t need to live off the income from your required minimum distribution (RMD), it allows you to meet the RMD requirement and it also allows you to reap the tax benefits.

Note that if you make a qualified charitable distribution, you will not be able to claim a tax deduction for charitable contributions made using the same assets.

Complete a conversion to a Roth IRA no later than December 31, 2022

You have until December 31 of this year to execute a conversion to a Roth IRA in preparation for the tax year 2022.

If you have kept a Roth IRA for at least 5 years and are above the age of 59 1/2 years old, you are eligible to reap the benefits of tax-free growth as well as tax-free disbursements, among other advantages. Because there are no RMDs, it is much simpler to ensure that your heirs get an inheritance that is exempt from taxation.

A conversion is an occurrence that triggers taxation.

There are no limits on income when converting assets from a conventional IRA to a Roth IRA, and you are not required to convert the whole amount all at once. Partial conversions make it simpler to spread out your tax payments over a period of two or more years, even though you’ll still be responsible for paying regular income taxes on any pre-tax amounts. You might want to think about converting a sum that will keep you in the tax band that you want to be in so that you can avoid paying a higher tax rate.

Timing matters

When deciding whether or not to convert, a common consideration is whether or not your current or future tax rate will be higher. If you believe that your current tax rate is lower than it will be when you begin taking withdrawals, converting your traditional IRA to a Roth IRA may be beneficial for you. This is because you will pay conversion taxes now while you are in a lower tax bracket, and then you will enjoy tax-free Roth IRA withdrawals later (when the higher tax bracket won’t matter).

It is also essential to keep in mind that when the Tax Cuts and Jobs Act of 2017 expires at the end of the year 2025, tax rates will likely be increased. If you have been delaying a Roth conversion, the prospect of higher tax rates in the future combined with the current state of the market may provide a compelling argument for you to get started on the conversion process.

Converting when the value of your retirement account is low gives you the opportunity to benefit from a market rebound in an account that grows tax-free, despite the fact that market volatility makes it nearly impossible to know when the best time to convert is. However, converting when the value of your retirement account is low gives you the potential to reduce your tax obligation over time.

Strategies for the administration of conversion taxes

If you are older than 72 years old, you are required to meet your RMD before converting, which would result in a taxable event. If you are younger than 72 years old, you are exempt from this requirement. Nevertheless, making use of a QCD can assist lighten the total tax load that is connected with a conversion.

The taxes that are incurred as a result of a conversion can be partially offset by claiming tax deductions for charitable donations and tax credits that could otherwise be carried over to other years.

Repay any dividends connected to COVID-19 in 2020 by the time the 2023 return window opens.

The Coronavirus Aid, Relief, and Economic Security (CARES) Act provided investors who were afflicted by COVID-19 with the opportunity to withdraw up to $100,000 from any and all IRAs or employer-sponsored plans in the year 2020. This was possible under specific health and financial conditions.

The income taxes might be stretched out over a period of three years, notwithstanding the fact that the distributions were not subject to the standard early withdrawal penalty of 10%. Investors had the option of returning some or all of the funds to an individual retirement account (IRA) or another retirement plan within three years of the date the funds were received. This allowed investors to continue to enjoy the benefit of tax-sheltered growth on the amount that was reinvested while also allowing investors to receive a refund or avoid paying taxes on withdrawals that were returned.

If you accepted a distribution under the CARES Act in 2020 and want to repay some or all of the sum, you have until 2023 to do so. If you took a distribution under the CARES Act in 2021, you have until 2023 to do so. The timing will be different for everyone because it will depend on when you got the monies.

Keep in mind, if you repaid any or all of your withdrawal during the 3-year window and paid any income taxes on the distribution amount, you may need to file an amended tax return (for the applicable years in which you paid taxes) in order to get a refund for the taxes that you already paid. If this is the case, you can get a refund for the taxes paid by filing an amended tax return.

Contact your Wealth Manager and team at 1-844-GALLEON to learn more.

This article is being provided for educational purposes only. The information contained in this article does not constitute a recommendation from any Global Advisers entity to the recipient, and Global Advisers is not providing any financial, economic, legal, investment, accounting, or tax advice through this article or to its recipient. Neither Global Advisers nor any of its affiliates makes any representation or warranty, express or implied, as to the accuracy or completeness of the statements or any information contained in this article and any liability therefore (including in respect of direct, indirect, or consequential loss or damage) is expressly disclaimed.

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