7 tax moves to do now

As you prepare to complete your 2021 tax return, now is a great time to review tax planning opportunities for 2022.

Too often people start thinking about their taxes when they are completing their prior year tax return. While you can learn from prior years, planning based on last year is like driving your car through the rearview mirror. So, let’s think ahead.

1. Increase or start contributing to your retirement plan at work – These retirement plans such as 401(k)s, 403(b)s allow you to defer up to $20,500 of your pay in 2022 (or $27,000 if you are age 50 or older this year). If you are not already contributing the maximum, this is a great time to increase your contribution rate. I suggest that you consider increasing your deferral by at least 1% every year until you reach the maximum. For many people, a one percent increase is manageable and has a relatively small impact on your take-home pay. If you are self-employed, there are other retirement plans such as a solo 401(k), SEP-IRA or SIMPLE IRA that can help you save for retirement. No retirement plan at work? Everyone with earned income can still contribute to an IRA.

2. Fill out a new IRS Form W-4 – This form tells your employer how much income tax to withhold from your paycheck each period. If you had a surprise tax bill last year, increasing your withholding will help you avoid a big payout to the IRS or the state. By completing the form now, you’ll start withholding at a higher rate for the rest of the tax year, which should make sure that your withholding is a better match to the tax you owe.

3. Make or revise your estimated tax payments – Paying extra money to the IRS may sound like a crazy idea but there are several reasons to begin making or adjusting these payments. Retirees and self-employed people usually have to make these payments but sometimes salaried employees should consider them, too, especially if they receive large bonuses or commissions. Basically, they are quarterly payments to the IRS or state made throughout the tax year. If you had a surprise tax bill for 2021, now is the time to start or revise your estimated tax payments so that enough is set aside for 2022.

4. Estimate your income and deductions for 2022 – By projecting your taxable income for the rest of the year, you can get an idea if you will be earning more or less than last year and whether that will cause you to cross over into a higher or lower tax rate. Over time most taxpayers move from one tax bracket to another as they move through different phases of life such as a promotion, new job, layoff, marriage / divorce, having children or retirement. When your life situation changes, it can mean a change to your tax bracket. So, the strategy you had before you were married with kids may no longer be the best strategy now.

5. Review your unrealized investment gains and losses – The last couple of years have been great for many US stock investors. So, finding losses to offset gains can be a challenge. But it may also have caused your investments to get out of balance. Reviewing your unrealized1 gains and losses may help you determine ways to rebalance your portfolio while minimizing capital gains taxes. Gains and proper asset allocation are not the only factors: making sure that you have adequate cash now and meet your intermediate and long-term needs should also factor into this review.

6. Consider a Roth conversion – If you are like most working professionals, you likely have a rollover IRA and some old Traditional 401(k) or 403(b) accounts. These accounts provide you with a nice tax break when funded because the money goes in pre-tax. But distributions will be subject to ordinary income taxes that are in effect when withdrawn. And, you’ll be required to start taking distributions when you reach age 72, whether you need the money or not.

For a surviving spouse who is 72 today and has a $2.5 million IRA, they will need to take a Required Minimum Distribution (RMD) of $161,290.2 All of that RMD is ordinary taxable income. When added to other income such as Social Security, pensions and investment income or capital gains, you could be looking at a pretty big tax bill every year. Generally, if you expect to be in the same or higher tax bracket in retirement, converting a pre-tax retirement account may be worth it.3

7. Gifting highly appreciated assets – Whether giving to family members or a charity, giving highly appreciated assets is often better than selling a stock and then giving the cash proceeds. Gifting can permit you to avoid paying capital gains (federal and state) on the sale of an asset. For 2022, an individual can gift up to $16,000 to any other individual under the Annual Exclusion for Gifts.4

Now is the time to lay the groundwork for your 2022 taxes. Still have questions about your situation or which strategies make the most sense? Give me a call. I can help you make smart choices. You can schedule a quick call with me by clicking HERE.

Lyman H. Jackson

Lyman@PlanWithFPS.com

617-653-3303

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Check out more blogs from us at www.PlanWithFPS.com/blog · 2021: Year of the Roth conversion https://planwithfps.com/blog/2021-year-of-the-roth-conversion · 10 year-end planning tips https://planwithfps.com/blog/10-year-end-planning-tips

· The IRA tax bomb and why Roth conversions are now more important than ever https://planwithfps.com/blog/the-ira-tax-bomb-and-why-roth-conversions-are-now-more-important-than-ever

Financial Planning Solutions, LLC (FPS) is a Registered Investment Advisor. FPS provides this blog for informational and educational purposes only. Nothing in this blog should be considered investment, tax, or legal advice. FPS only renders personalized advice to each client after entering into an advisory relationship. Information herein includes opinions and forward-looking statements that may not come to pass. Information is derived from sources believed to be reliable. Information is at a point in time and subject to change without notice. Such information may not be independently verified by FPS. Please see important disclosures link at the bottom of this page.