Filing income taxes can be a stressful experience for anyone. However, the more steps you take to plan ahead for taxes, the better off you’ll be. As the year draws to an end, it’s important for you to begin year-end tax planning before tax season is upon us.
If you wait too long to formulate your year-end tax planning, you may end up missing out on deadlines and strategies available to you.
Here are some important year-end tax planning tips for your income taxes:
Year-end Tax Planning
1. Take advantage of retirement investing
United States tax laws offer taxpayers different ways to cut their taxes by putting income toward specific financial goals. When you use retirement investments wisely, they can add up to great tax savings for you and your family.
This is a commonly used year-end tax planning strategy because you’ll know your self-employment income and be able to max out contributions.
Retirement accounts like 401(k) plans and traditional IRAs allow you to defer the taxes on the annual contribution amount until you retire and decide to use that money. This will also allow you to reduce your taxable income by your contribution amount for the year, offering tax savings. Even self-employed digital nomads and RVers can take advantage of this option.
Roth IRAs allow you to save toward your retirement without having to pay any taxes on the income generated by those investments. However, this doesn’t help reduce income and therefore, income taxes in the current tax year.
2. Look out for possible deductions
While the standard deduction is automatic it’s not always the best deduction plan for you to use. If you keep records and itemize your deductions, you may actually get a much larger deduction. The best way to know is some year-end tax planning.
What’s included in itemized deductions?
Medical expenses include medical mileage, copays, dentists, eyeglasses, etc.
Sales tax or income tax
Real estate taxes
If you’ve paid high medical bills over the past year, you’ve paid a large amount of sales tax (ie. bought an expensive RV) or you’re a homeowner, itemizing your deductions may be more advantageous than taking the standard deduction.
The 2022 standard deduction rates are high…
$19,400 Head of household
$25,900 Married filing jointly
While I don’t see as many taxpayers being able to utilize itemized deductions, if any of the expenses above are high for you, it may be to your benefit.
The key here is keeping detailed records of medical costs, charitable contributions, etc.
If you’re responsible for state taxes, keep in mind the standard deduction is different for state and federal taxes, and while you may prefer it for one set of taxes, that doesn’t necessarily mean you should take it for both.
3. Take all the credits that are available to you
There are credits for a variety of things, such as children or dependents, paying higher education expenses, making environmentally-friendly home improvements (yes, an RV can count for these), and so on. You can take these tax credits if you know when they’re available and how to take them.
Keep yourself apprised of possible tax credits throughout the year and keep track of paperwork and other proof that shows you deserve each one. At the end of the year, gather them all up in preparation for income tax filing so you can take advantage of them.
The solar tax credit has been extended and it definitely available to those who consider their RV their home. Don’t let this one get away if you install solar on your RV.
4. Take any RMDs from traditional retirement accounts
If you’re age 72 or older, you are required by the tax law to take required minimum distributions (RMDs) from any 401k, SEP or SIMPLE IRAs. The IRS sets the rules on exactly how much is required. It’s based on your age.
All employer-sponsored retirement plans, traditional IRAs and SEP and SIMPLE IRAs mandate required minimum distributions (RMDs) by the April 1 that follows the year you turn 72. Thereafter, annual withdrawals must happen by December 31 to avoid the penalty.
There’s nothing to say that you must spend this money or even let hit your personal bank account. It can reinvested if you prefer.
TIP: You can make charitable contributions out of a retirement account that will count towards your RMDs for the year.
RMDs are considered taxable income. If you don’t take the RMD, you face a 50% excise tax on the amount you should have withdrawn based on your age, life expectancy, and beginning-of-year account balance.
Take action: Take your RMD by December 31. Once you turn 72, you must take your first withdrawal on or before April 1 the following year to avoid penalty.
5. Sell investments to offset gains
A key year-end tax planning strategy is called “loss harvesting”—selling investments such as stocks and mutual funds to realize losses. You can then use those losses to offset any taxable gains you have realized during the year. Losses offset gains dollar for dollar.
And if your losses are more than your gains, you can use up to $3,000 of excess loss to wipe out other income.
Anything beyond $3,000 gets carried forward to future years. You can use it then to offset any 2023 gains, plus up to $3,000 of other income. You can carry over losses year after year for as long as you live.
The bottom line is that a little research, planning, and early preparation can pay off in a big way. If you begin year-end tax planning now as 2022 draws to a close, you’ll be more than prepared for tax day and beyond.