5 Tax Moves to Consider Before Year-End

With the holidays right around the corner, taxes might be the last thing on your mind. But a little bit of preparation now could make a big difference come April.

Here are five things to keep an eye on as the year ends.

1. Increase your 401(k) contributions if you can

Contributing to an employer-sponsored retirement plan, like a 401(k), allows you to save for retirement — and get a tax break for doing so. Contributions are typically made pre-tax, which means that they can reduce your taxable income for the year.

How much you contribute is likely influenced by what you can afford and how far away from retirement you are. In 2022, taxpayers can contribute up to $20,500 into a 401(k), and those age 50 or older get a catch-up that allows them to contribute up to $27,000.

Employers also often match a portion of your contributions. According to a 2022 Vanguard study, the average promised employee match hovered around 4.4% of salary in 2021.

But if you’re contributing only enough to get that match, you could be leaving some money on the table, says Clay Ernst, a Colorado Springs-based certified financial planner and the executive director of financial planning for Edelman Financial Engines. Why? Because the more you contribute by Dec. 31, the more you can shave off your taxable income for the year.

2. If you’re newly self-employed, think about a solo 401(k)

If you’re a freelancer or otherwise self-employed, opening a solo 401(k) — a retirement savings plan for an individual who is a business owner with no employees — may not have been at the top of your list this year. But there are several benefits to establishing a plan, including that contributions you make can lower your taxable income.

A nice bonus? While you only have until Dec. 31 to open the account, you get until the tax-filing deadline — April 18, 2023 — to make contributions to the account that will qualify for a 2022 deduction, says Ernst.

3. Take stock of your investment losses

If you’re an investor who’s been watching the stock market take downward swings through gritted teeth in 2022, this may be an especially good year to take advantage of tax-loss harvesting, a strategy that can help you to squeeze a little lemonade out of the lemons in your portfolio, says Ernst.

How it works: Investors who sell investments at a loss can generally subtract that loss against any investment gains they’ve cashed in. And if their total losses exceed gains, they can even offset up to $3,000 of ordinary income and carry over any leftover losses to deduct in future years.

A few notes: Tax-loss harvesting can only be performed on assets sold in taxable accounts, like brokerages. The strategy can’t be applied to investments in tax-advantaged accounts, like 401(k)s or IRAs. It’s also worth working with a tax or financial advisor, as an expert can ensure this strategy is the right one for you and keep you on the right side of IRS rules, which can be complicated.

4. Consider deferring income

The hope is that you’ve had enough tax withheld throughout the year to avoid a surprise bill. However, a few things — like freelance work or a bonus — could inflate your total earnings.

If you’re a self-employed worker who bills their clients per project, you might consider holding off on invoicing if you think extra income might bump up your 2022 earnings.

“If you bill for your services, say, later in the year, in the third or fourth week of December, it’s highly likely at that point that you won’t receive the income until the next tax year,” says Ernst. This move can allow you to rein in your taxable income for 2022 and plan for 2023.

If you’re expecting a bonus and think your income might be lower next year, you could ask your employer to hold off on paying it out until January. Weigh it carefully, though; this maneuver doesn’t make sense for everyone. After all, you’re merely pushing off the taxes until 2023 — not avoiding them forever.

5. Look into a Roth IRA conversion

Roth IRA conversions allow you to transfer the assets in your traditional IRA into a Roth IRA so that your investments’ growth, and qualified withdrawals, get tax-free treatment in the future. The downside is you’ll likely pay taxes on the amount converted.

A down market can actually help here: If the value of your account has gone down, you’re converting less money, which can translate to lower taxes owed.

Be mindful of a few drawbacks, however. In addition to the conversion taxes, the move can push you into a higher tax bracket. And an inflated income can have a ripple effect on a few other things, like your general tax liability. If you’re retired or about to retire, it can also affect how much of your Social Security is taxable and how much you pay for certain Medicare premiums.

The investing information provided on this page is for educational purposes only. NerdWallet does not offer advisory or brokerage services, nor does it recommend or advise investors to buy or sell particular stocks, securities or other investments.

Sabrina Parys writes for NerdWallet.

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Higher Inflation Could Mean Smaller Tax Bills for Some

The latest data from the U.S. Bureau of Labor Statistics doubles down on what has become 2022’s loudest refrain: Sometimes the race to beat inflation is just a slow crawl.

And while persistently high inflation is hardly cheerful news, a set of annual adjustments that are tied to an inflation index could provide relief in one unexpected area — taxes.

Keeping bracket creep at bay

Typically in early November, the IRS releases a swath of adjustments to various tax provisions, including tax brackets, standard deductions and certain tax credits for the forthcoming tax year.

These adjustments are tied to the Chained Consumer Price Index for All Urban Consumers, or C-CPI-U, and the IRS’ goal is to prevent bracket creep. In other words, these annual tweaks allow the IRS to ensure that inflation doesn’t eat away at the original basis for a tax credit or threshold.

Take, for example, a married couple filing jointly with a taxable income of $80,000. In 2022, this would put the taxpayers in the 12% tax bracket. If that couple together were to receive a $10,000 pay bump as a cost-of-living adjustment in 2023 and no changes were made to the brackets, that raise would push a portion of their earnings into the next bracket, to be taxed at a higher rate of 22%.

By adjusting the income thresholds each year to account for inflation, the IRS is acknowledging that the economic landscape is changing and that you should not be penalized if your salary’s purchasing power essentially remains the same, says Mark Luscombe, a certified public accountant and principal federal tax analyst for Wolters Kluwer Tax and Accounting in Riverwoods, Illinois.

What’s expected to be different in 2023

This year’s historic rate of inflation has affected about everything — including projections of the adjustments that will come from the IRS this fall. Several tax analysts are anticipating a roughly 7% increase across numerous tax provisions, compared with a 3% increase last year.

Sizable tax bracket adjustments

Perhaps the most significant callout from the projections is a considerable adjustment to income thresholds across all filing statuses for 2023. According to Wolters Kluwer projections, those who are married filing jointly, for example, might see the ceiling for the 12% tax bracket rise from $83,550 in 2022 to $89,450 in 2023. This could help keep some folks out of a higher tax bracket (and potentially a higher bill).

Also likely is a larger-than-usual bump to the standard deduction, a flat amount taxpayers can use to reduce their taxable income. Wolters Kluwer projects couples who are married filing jointly might be able to take up to $27,700 in 2023, up from $25,900 in 2022.

Expanded tax credits

Another bonus we may see is adjustments to certain tax credits, which could mean additional savings for some taxpayers. A Bloomberg Tax analysis projects that the refundable portion of the popular child tax credit could rise from $1,500 to $1,600, and the earned income tax credit, a benefit meant to aid lower-income taxpayers, could jump from a maximum of $6,935 to $7,430 for families with three or more kids.

Higher savings contribution limits

Taxpayers may also get a chance to increase their contributions to certain tax-advantaged accounts, which in some cases can also lower their taxable income.

Per Bloomberg Tax, you may be able to contribute up to $6,500 in 2023 to an IRA (up $500 from 2022). Those 50 or older also generally get a catch-up contribution that lets them funnel in an extra $1,000. As for contribution limits for employer-sponsored retirement accounts, like 401(k)s, Luscombe says we should expect similarly significant increases. The IRS is expected to release the official numbers in the coming weeks.

Those with health savings accounts, or HSAs — which allow you to contribute a certain amount of your salary pretax for medical expenses — may be able to contribute up to $3,850 for themselves or up to $7,750 for a family in 2023.

No guarantees

Though these adjustments will likely allow taxpayers to take a more generous standard deduction or funnel more money into accounts that could lower taxable income, there’s no guarantee tax bills will be smaller — numerous factors affect your overall tax liability.

It’s also important to note that some tax provisions are not annually adjusted for inflation, Luscombe says. This includes certain tax breaks like the state and local tax deduction, which is capped at $10,000 until 2025, and the capital loss deduction, a provision that allows investors with net losses to lower their taxable income by a max of $3,000 per year.

The bottom line: Changes to the code are meant to act as damage control; folks whose wages may not have kept up with inflation could potentially see a benefit, and those who received a cost-of-living raise may avoid getting bumped up into a higher tax bracket. And a lucky few of us, perhaps, may end up with a lower tax bill.

Sabrina Parys writes for NerdWallet.

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