If you want to reduce your 2022 tax bill, time is rapidly running out. It's December, and most tax-related financial moves need to be completed by the end of this month in order to affect this year.
As a result, these three year-end tax moves are ones you should consider before the calendar turns over to 2023. That way, you can keep more of your money working for you while setting yourself up for an easier net tax bill to deal with when planning for the April filing deadline.
Image source: Getty Images
1. Get as much as you can into a traditional 401(k)
If you're under age 50, you can contribute as much as $20,500 into a 401(k) or similar employer-sponsored retirement plan. If you're 50 or older, that limit increases by $6,500 to $27,000. Generally speaking, you need to contribute that money directly from your paycheck, and it needs to be contributed by Dec. 31 to be counted toward your 2022 limit. As a result, if you want to make adjustments to get closer to your 2022 contribution limit, now is your last, best chance to do so.
If you contribute to a traditional-style 401(k) plan, the money directly reduces your taxable income for the year, dollar for dollar. By lowering your taxable income, you'll generally reduce the amount of taxes you owe for the year. As a result, getting as much as you can into a traditional 401(k) by the end of this month can be a great way to keep your taxes down.
2. Harvest your investing losses for tax benefits
If, like many investors, you have investments with substantial paper losses from the market's shellacking in 2022, now might be a great time to harvest those losses to reduce your tax bill. Capital losses will offset any capital gains you might have taken within the year, dollar for dollar.
If the capital losses you take exceed your capital gains, you can even use up to $3,000 of those excess capital losses to reduce your ordinary income, which can also help lower your taxes. If you have even deeper capital losses than that, the excess losses will carry forward to the next year, giving you a potential future tax reduction as well.
That benefit is only available to you for 2022 if you close out your investments early enough -- generally by the end of December. So if you want the opportunity to lower your income (and thus your taxes), your time is rapidly running out.
Do note that if you want to buy back into the same (or a "substantially identical") investment, you must wait for more than 30 days before buying back in to avoid a wash sale. If you do have a wash sale, you can't deduct your loss until you completely close out your position or until the loss -- including the wash-sale piece -- turns into a gain that you close out.
3. Make sure you withhold enough taxes to be in Uncle Sam's good graces
You don't have to get your 2022 tax withholding perfect until the filing deadline in April 2023, but you are expected to get it close throughout the year. There are three tests -- known as the safe harbor tests -- that the IRS uses to determine whether you were close enough throughout the year to avoid penalties.
The first test: If you've withheld enough to be within $1,000 of what you owe by the end of the tax year, you're covered.
The second test: If you've withheld at least 90% of what you owe by the end of the year, you're covered.
The third test: If you've withheld at least 100% of what you owed for the previous year (110% if you're considered high income), you're covered.
If, by the end of the year, you've had enough withheld from your paychecks (or other accounts where withholding is possible) to be covered by at least one of those three tests, you're fine. You just need to true up to the total amount due by the tax filing deadline (typically April 15 of the next year) and you won't owe anything extra.
Time's running out -- you'd better get a move on soon
All three of these moves need to be done this month if you want them to affect your 2022 taxes. So if you're interested in keeping your total tax burden for 2022 in check, get your plan in place today to give you the best chance of meeting that crucial year-end deadline.
