Your tax to-dos before the end of the year

Before January 1st, take some time to tick off these tasks while they still count.

6 tax to-dos before the end of 2022

Federal tax returns and payments are due April 18, 2023 (state deadlines vary, but many match the federal deadline). While W-2 income statements don’t mail out until late January, you can now use an online calculator to estimate what you may owe. All you need are your payslips for the year showing how much you earned and how much you paid in income taxes.

If you’re hoping to reduce your tax bill or potentially increase your refund, here are some strategies you can try and a time-saving tool to make your tax return preparation easier.

1. Create an online IRS account

Tax season tends to go smoother when you’re organized. Take 15 minutes to set up an online account on the IRS website so you don’t have to rummage through desk drawers or call your former employer for a last-minute replacement copy of your W-2.

While you can’t file taxes from your account, you can access digital copies of your tax returns and income documents for the last four years, pay a balance, make an estimated quarterly payment, create a payment schedule, and get a deadline extension.

To create an account, you must have a passport, driver’s license, or ID card to hand. The IRS uses the ID.me platform for identity verification, so the process also requires either a selfie using facial recognition software or the recording of a short video chat with an agent.

2. Contribute to employer-sponsored retirement accounts

If you have access to a 401(k), 457, or 403(b) plan through your employer, your contributions will be deducted from your paycheck before any income taxes are deducted (you’ll pay taxes later on your payouts). .

Let’s say your gross annual salary is $90,000 and you contribute 10% of your salary, or $9,000, to your 401(k) by deferring paychecks throughout the year—that brings your taxable income to $81,000. Thanks to pre-tax pension contributions, your top tax rate is 22% instead of 24%.

Each retirement plan has an annual contribution limit. If you haven’t hit the limit and can afford to put more of your last paycheck into the plan this year, this is a good option, says Marla Chambers, accountant and chief financial planner at Buckingham Advisors.

Most employers will allow you to adjust your deferral amount “at short notice” if you contact HR directly, Chambers adds.

If you can’t make it by December 31, consider contributing to a traditional IRA. Deposits are tax deductible for 2022 through the April tax deadline and can be claimed as a tax deduction (they’re essentially the same as a pre-tax salary deferral) if you meet the income and filing status requirements.

3. Rate the standard deduction versus the individual deductions

The vast majority of taxpayers are taking the standard deduction to reduce their income by a predetermined amount: $12,950 for singles and $25,900 for married joint taxpayers in 2022.

However, some taxpayers may be able to unlock an even larger deduction by adding up certain allowable expenses known as itemized deductions. This includes state and local taxes, property taxes, mortgage interest, out-of-pocket medical expenses, losses related to theft or state-declared disasters, and donations to tax-exempt charities.

If you’ve paid any of these expenses during the year and think the total might add up to more than the standard deduction for your enrollment status, it’s time to do the math to determine if the switch is worth it. If you’re close to eclipsing the standard print, consider “bundling” future releases into this year, Chambers says.

For example, if your mortgage payment is due on January 5, pay it in December instead so you can count the interest portion as an expense for 2022. Similarly, if you plan to donate money to your favorite charitable cause on a regular basis, consider deferring some of next year’s scheduled donations to this year. “It’s a great planning tool and pretty easy to use,” says Chambers.

4. Sell losing investments to offset gains

The IRS taxes capital gains, which is gains you make when you sell a stock, exchange-traded fund (ETF), or mutual fund.

But not all investments appreciate in value – and you can use that to your advantage. If you have an investment that has fallen in value since you bought it, you have until December 30th, the last trading day of the year, to sell it and claim a loss. This loss will be offset against your capital gain for the year, effectively reducing the taxable amount.

For example, if you made a $6,000 gain this year from the sale of stock A, but realized a loss of $4,000 from the sale of stock B, then your total taxable gain is $2,000.

If your total capital gains drop to zero and you’re still losing, you can offset your income for the year up to $3,000. “This year in particular has been a good year to look at stocks that are at bottom,” Chambers says.

This strategy, known as tax-loss harvesting, is a popular and effective tax-saving tool for investors using brokerage accounts (it doesn’t work with retirement accounts due to the tax-deferral features). Some robo-advisors even do this automatically. However, in order to maintain a balanced portfolio, experts recommend buying back similar investments after the sale.

“Now the IRS has a small caveat to this rule, that you can’t buy the same security within 30 days of the sale as that would violate a wash sale,” said Jonathan Johnson, accountant and chief financial advisor at Blue Chip Partners .

For example, you can’t sell your shares in Coke to claim a loss and then immediately buy them back, he explains. But you could buy Pepsi because it’s a different company (or just wait 30 days) and maintain your exposure to the sector, Johnson says.

5. Contribute to a 529 Education Savings Plan

College is becoming more expensive each year, and more and more families are looking for effective ways to increase funds to cover tuition and other school-related expenses.

One option is the 529 Savings Plan, which allows people to invest money in stock and bond funds but not pay federal capital gains taxes on growth if they use the money for qualifying education expenses. It also offers more immediate and often more generous state-level tax breaks.

According to a report by BlackRock, which administers a 529 plan in Ohio, three dozen states offer income tax credits or deductions to anyone who deposits money into a 529 account, including parents, grandparents and other relatives (only in a handful of states). the account holder is entitled to the tax benefits).

Additionally, Chambers adds, “If a state allows a $5,000 deduction but you give $10,000, most states allow the transfer [the difference] for years to come until you use it up.” Check your state’s plan options — some even allow tax breaks for people who save on another state’s plan.

6. Check your tax deduction for the next year

In preparation for the New Year, take the time to review and update Form W-4 if you are an employee or hourly employee. This document tells your employer how much to deduct from your paycheck to cover taxes.

Any time your personal or financial situation changes (like getting married, having a baby, or taking on a second job or gig work), it’s a good time to review your withholding.

If you owe Uncle Sam money in April, you didn’t hold back enough. If you end up getting a refund, you withheld too much. If you didn’t update your W-4 in 2022, look back at your 2021 tax return to see how much was withheld and what your tax bill or refund looked like to make adjustments for the upcoming calendar year, Johnson says.

File a new W-4 as soon as possible so the correct amount is withheld from your paychecks in 2023—employers can take up to 30 days to update payroll deductions.

take that away

The clock is ticking down to make some key tax moves for 2022. If you’re looking to reduce your taxable income, strategies include increasing your 401(k) contributions and considering the possibility of itemizing your deductions. If you are an investor, consider using tax losses to reduce your losses on depreciated investments.