top 10 year-end tax tips
The end of the year is upon us. While we focus attention on the spirit of the holiday season, it’s also a great time to assess important aspects of your tax and financial situation. A consistent theme we discuss at this time of year is maximizing your short-term tax benefits to complement your long-term financial plan. Before 2022 closes, consider some of these tax related tips.
MAX OUT YOUR RETIREMENT ACCOUNT CONTRIBUTIONS
Depending on whether you use a Traditional IRA, Roth IRA, 401(k), 403(b), SIMPLE IRA, or SEP IRA, tax advantaged retirement accounts compound investment returns either as tax-deferred or tax-free. Contribution limits and deadlines for annual contributions vary by plan type, so make sure to understand how to maximize your opportunity.
Take Action: Discover your plan type contribution limits on our Essential Financial Figures document. Let us be your guide when you have questions about your retirement account or need one established.
Pare REALIZED CAPITAL GAINS BY Recognizing Unrealized LOSSES
Unlike last year, 2022 has been filled with periods of uncertainty and market volatility. As much as no one likes to endure inevitable market declines, take advantage of realizing losses to offset realized gains and potentially receive a tax deduction up to certain limits. You can also consider realizing portfolio losses to offset gains in other highly concentrated positions which, if sold, enable a tax efficient means to better diversify your holdings.
Take Action: To maintain portfolio balance, look over your gains and losses within your non-IRA investment accounts and consider tax efficient portfolio adjustments, especially in concentrated positions. You may offset realized gains by recognizing current unrealized losses or applying any applicable prior year loss carryforwards.
ACCOUNT FOR MUTUAL FUND CAPITAL GAIN DISTRIBUTIONS
While effective investment tools, actively managed stock mutual funds often distribute year end capital gains and catch some investors off guard. Even when markets are down, it is not uncommon for fund managers to distribute 1-8% of underlying asset values in any given year as taxable capital gains. This unforeseen event could push you over certain income tax related thresholds. Take inventory now to be prepared for an event that could affect your income and tax liability.
Take Action: We prepare capital gains estimates for prospective clients based on known or estimated mutual fund capital gains distributions. Send us a list of your fund holdings and we will create an analysis of your potential tax exposure.
CONSIDER CONVERTING A PORTION OF YOUR TRADITIONAL IRA TO A ROTH IRA
Traditional IRA distributions are fully taxable at ordinary income rates, whereas Roth IRA distributions are tax-free, including any accumulated earnings over the years. It could make strategic sense to realize taxable income now by converting a portion of your traditional IRA to a Roth IRA for the potential long-term benefits of tax-free principal accumulation and future income. Market volatility in 2022 caused price declines, thus now provide opportunity to convert more shares of stock for similar taxable consequence as converting fewer shares at formerly higher prices.
Take Action: Work with StrongBox Wealth and your accountant or tax advisor to determine how much, if any, Roth conversion income may be appropriate to incur given historically low current tax rates.
Remember YOUR REQUIRED MINIMUM DISTRIBUTION (RMD)
If you are over 72 or have an inherited IRA, make sure to withdraw the required minimum distribution by end of the year. The 50% IRS penalty on undistributed RMDs is something everyone should avoid.
Take Action: If you’re unsure what your RMD is this year, take a moment to complete the IRS RMD Worksheet, then withdraw at least the RMD amount before December 31.
PLAN YOUR YEAR-END GIVING
Means to give vary from donating food and clothing, cash, appreciated assets, or through a Donor Advised Fund, one of our preferred choices. With an itemized tax return, you will receive a current year tax deduction of your contribution amount up to applicable income limits. It’s easy to then make grants from your fund to nonprofit organizations of your choice, as and when you see fit. For those that don’t need their IRA RMD and wish to direct it to charity otherwise, consider a Qualified Charitable Distribution.
Take Action: Ask us how you can support your preferred charitable organizations in a tax efficient way like a Donor Advised Fund or a Qualified Charitable Distribution. You can contact us by phone at 816-607-5410 or e-mail at [email protected].
UNDERSTAND THE TAX IMPLICATIONS OF YOUR EQUITY COMPENSATION
Stock options such as Incentive Stock Options (ISOs) and Non-Qualified Stock Options (NQSOs), Restricted Stock Options (RSUs), Employee Stock Purchase Plans (ESPPs) are all taxed differently. Understanding your current year and ongoing equity compensation tax impact is an essential element of a well devised comprehensive financial plan.
Take Action: Collect your relevant equity compensation program documents and schedule an appointment with us to understand your tax exposure. We will craft a customized and tax efficient action plan tailored to your personal circumstance.
REVIEW YOUR PAYCHECK WITHHOLDING
Depending on your W-4 designated tax withholding allowances, you may end up with a refund or owing taxes, often based on stale designations made years ago with your employer. Many individuals forget W-4 updates after significant events such as a marital status change or when a child is no longer claimed as your dependent. It is a quick remedy to properly calibrate your tax withholding to avoid a surprise at tax time.
Take Action: Use the IRS Tax Withholding Estimator to discover if you have been withholding the proper amount. If you believe corrective adjustments should be made after your review, request a W-4 and file it with your employer.
ASSESS YOUR INCOME AND LIQUIDITY NEEDS FOR THE YEAR AHEAD
Any known liquidity and income distribution needs should be planned and prepared for well ahead of time by sourcing and positioning ample means of interest bearing cash-based instruments to cover anticipated expenses. A backup liquidity plan should also be in place for unexpected life events that occasionally surface throughout any given year such as major home repair, health related expense, or assisting a family member.
Take Action: Talk with us about potential changes to your income or upcoming cash outflows. It may be prudent to adjust your portfolio in alignment to your upcoming needs or replenish diminished cash reserves.
REASSESS YOUR RISK TOLERANCE
While investment portfolio accumulation has been a challenge this year, there remains an ever present need to keep your portfolio in line with your long-term risk tolerance. Along with proper year-end tax planning and a financial plan review, a recommitment to your ongoing underlying portfolio risk exposure is necessary. However, if long-term goals, short-term needs, or time horizons have otherwise changed, your portfolio’s underlying risk exposure should also be addressed.
Take Action: Take our brief, yet thorough, Risk Assessment. We’ll then guide you through a series of uncomplicated steps, designed to ensure your investment portfolio properly aligns with your risk tolerance and return expectations.
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