Planning for your tax responsibilities can be challenging. If you have multiple income streams, you could pay a significant percentage to the government.
Although taxes are something that most people pay, smart money management can reduce your liabilities significantly. It helps to have a plan going into this process so that you’re not caught off-guard with extra payments or responsibilities.
As you plan your taxes at the end of 2022, some significant steps can help you reduce your liability.
2022 Year End Tax Planning
Administrative deadlines for several financial strategies that maximize contributions and minimize what is owed to the government occur throughout the year. Consider shifting income, credits, or deductions between 2022 and 2023 whenever possible to ensure the outcomes accurately reflect earnings.
Each household and business have unique needs to consider with their 2022 year-end tax planning. Some of these strategies might not apply to everyone, but they offer ways to limit your obligations when it’s time to file your documents with the IRS.
Here are some of the most overlooked ways to reduce your obligations and plan for the future.
1. Depreciation Benefits
Are you planning to purchase large-ticket items soon? The best time of year for that is November and December, especially if you have significant income. You can total up to $1 million in assets and fully depreciate them in the first year. That means your tax liability is reduced by that amount.
There are some limitations to this potential benefit.
- This tax planning strategy doesn’t apply to any land or properties.
- If you purchase a vehicle, specific gross weight and MSRP limitations must be met.
- You can finance the transaction, but it cannot be a lease.
Some assets qualify for bonus depreciation. Under these rules, a 100% allowance is offered for items purchased and placed in service before December 31, 2022. However, that allowance diminishes to 80% in 2023.
2. Income Management
If you’re self-employed, you can often invoice clients at your discretion. Even freelancers who work with intermediaries can control when they request monetary withdrawals. When you know your income could be close to the limits of the next tax bracket, it is wise to hold off taking the next check until 2023.
For those that can’t defer income, consider paying tax-deductible debts with the money to lower your potential obligations. However, the majority of those payments will be principle and most probably do not include interest.
The same applies to most vendors, if they grant you a 30-day or 60-day payment term, you may want to pay them now in order to claim those deductions for 2022.
Some of the deductions that you could make on the personal side are for example paying your property taxes in December instead of January.
Insurance bills are also a good example, you might want to pay those now, instead of 2023.
Mortgage and student loan interest is usually tax-deductible. Money borrowing for investment properties, stocks, bonds, or mutual funds also qualifies, but there are caps to what you can claim.
The main takeaway is that you want to defer your income to 2023 if possible and pay obligations early to claim them for 2022.
3. Health Savings Accounts (HSAs)
If you have a health insurance plan with a deductible of $1,250 or higher for singles or $2,500 for families, you’re eligible to contribute to an HSA.
This strategy lets you save on taxes by having your salary directly contribute to qualified medical expenses throughout the year. The 2022 limit for HSA contributions is $3,650 for individuals and $7,300 for family plans.
In 2023, those rates will rise to $3,850 and $7,750, respectively.
An HSA operates a lot like a Roth IRA. The contributions you make to it aren’t taxed, and you can make investments that grow the fund without being taxed on them.
Some employers offer HSAs as a direct benefit with a contracted provider. If you have a qualifying health insurance deductible and need to invest yourself, several companies can help you manage your account.
Each has different strengths and weaknesses to consider, so carefully review each provider before creating your HSA.
- Fidelity
- The HSA Authority
- Lively
- Further
- HSA Bank
- HealthEquity
4. Max Qualifying Retirement Contributions
If your MAGI (modified adjusted gross income) is under $144,000 in 2022 as a single taxpayer, you qualify for a Roth IRA. That figure rises to $208,000 for married taxpayers who file jointly.
Since your money gets taxed before being deposited into a Roth IRA, you can invest without worrying about additional taxation in most circumstances. That includes any dividends you receive from your activities.
You can also withdraw money from a Roth IRA without penalty for several qualifying reasons. If you take earnings out early, the IRS will levy extra costs.
These contributions don’t provide an end-of-year tax benefit because they’re not deductible, but the upside is that what you take for retirement is tax-free.
You can deduct a traditional IRA, 401(k), or 403(b) contributions. If you’re self-employed, you can direct income toward these retirement savings opportunities for massive savings. Up to 25% of your net earnings, up to $61,000 in 2022 and $66,000 in 2023, are eligible with Form 5305-SEP and opening a qualifying SEP-IRA through a financial institution.
Here’s a closer look at what you can do with your 2022 year-end tax planning.
| Retirement Savings Option | 2022 Maximum Limit | 2022 Catch-Up Max Limit |
| IRAs (Roth & Traditional) | $6,000 | $7,000 |
| 401(k) | $20,500 | $27,000 |
| SEP-IRA & SARSEPS | $61,000 | None Permitted |
| SIMPLE IRA | $14,000 | $17,000 |
Only taxpayers who are 50 and older qualify for the catch-up contribution limits.
If you don’t earn enough to reach the maximum amount, your total contribution can only be up to your reported income.
5. Sell Investments at a Loss
You cannot take this strategy in an IRA plan. If you have capital gains from 2022 investments held in a personal account, you can sell holdings at a loss until the last trading day of the year.
Most individuals can take up to $3,000 in overall capital loss each year. It’s crucial to understand that limit so that you don’t lose more than you can claim.
If you plan to purchase the same securities within 30 days, the IRS disallows the loss due to wash sale rules. Wait the extra time to avoid this complication.
6. Family Help
If a business is a parent’s sole proprietorship or a partnership where each partner is the child’s parent, payments to kids are not subject to Social Security or Medicare taxes. You’ll have income withholding to manage, but the funds stay in the family while you get to write it off as an expense. That lowers your overall net responsibility within the scope of the business.
If the child does work for your non-corporation business in 2022, you can hire them tax-free and pay up to $12,000 per year. They don’t pay income tax on it, and you get to deduct their wages.
Each child must file their own tax return. They’d pay no federal tax income if they made less than $12,000. You can put the maximum contribution into a deductible IRA and use their standard deduction to take their taxable income to zero.
That means the business could deduct up to $12,000 per child without taxable income. You must show evidence of work and that the tasks are age appropriate.
Have You Started Your 2022 Year End Tax Planning?
Tax planning at the end of the year takes time, but it can limit liabilities significantly. Several strategies are available up to 12/31 or later, depending on each household’s situation. Each option requires specific actions, so ensure a paper trail showing the appropriate steps were taken.
If you go over some credits or deductions, they can be transferred to the 2023 tax year to limit liabilities.
It helps to track your expenses to provide an accurate representation of your qualifying costs. I like to use the Raven Pro Document Scanner, which can process up to 40ppm directly to your integrated cloud services.
Once the receipts are scanned, they become searchable. That makes it much easier to organize things at the tax year’s end.
You receive wireless scanning, a massive 8-inch display, and editing capabilities without needing a computer. It saves me dozens of administrative hours each year.
It’s never fun to pay taxes, but you can limit this financial issue with intelligent money strategies throughout the year.
