After a year of rising inflation, rising interest rates and turmoil in the stock market, Americans are turning every stone to see where they can save money for Christmas gifts. (J. Scott Applewhite, Associated Press)
Estimated reading time: 5-6 minutes
WASHINGTON — After a year of rising inflation, rising interest rates and turmoil in the stock market, Americans are turning every stone to see where they can save money for Christmas presents.
While that may still seem like a long way off, experts say you can improve your financial situation by optimizing your taxes in 2022. While it won’t make you rich overnight, you can lower your tax bill in 2023.
Ask yourself if these strategies will suit your situation and, if in doubt, consult your CPA or tax advisor to help you with your projections.
Donor Advised Fund
Greg Wilson, Chartered Financial Analyst, recommends looking into a donor-advised fund. A donor-advised fund, also known as a DAF, is a type of charitable giving account that allows donors to make a charitable contribution, receive an immediate tax deduction, and then recommend grants from the account to their charities. favorite charities over time.
Greg explains, “DAFs are a simple and effective way to reduce taxes while supporting the causes you care about. When you contribute to a DAF, you benefit from an immediate tax deduction for the total amount of your contribution. -free, and you can recommend grants from the account to your favorite charities over time.
DAFs are especially popular with year-end giving, as they offer a way to reduce your taxes while supporting the causes you care about. By contributing to a DAF before 1 Dec. 31, you can get an immediate tax deduction for your contribution and recommend grants from the account to your favorite charities in the new year.
Greg added, “If you’re looking for a way to lower your taxes and support the causes you care about, a donor-advised fund may be right for you.”
Health savings account
Riley Adams, CPA, shares her expertise. Riley says, “My favorite year-end tax tip is to contribute to a health savings account and invest the money for your future health care needs or possible retirement.
Breaking down the benefits of Health Savings Accounts in more detail, Riley explains, “The account has three tax benefits, combined to serve as the most tax-efficient account in America: First, you don’t pay taxes on the income paid to ” the account; second, you pay no taxes on income and gains made on investments inside the account; and third, you don’t pay taxes on withdrawals if they’re used for eligible health care expenses.”
He added: “You can only contribute to the account if you also have an eligible high-deductible health plan, and contributions can be invested over long periods of time for future use. If you never need the money for healthcare costs, you can treat the account like an IRA and take distributions in retirement, only paying taxes on the distributions like you would with a traditional IRA.”
Tax loss harvest
Allen Mueller, Chartered Financial Analyst and Master of Business Administration, recommends looking at tax loss harvesting.
He explains, “Tax Loss Harvesting (TLH) positions (investments) in a taxable account with unrealized losses. These losses will offset realized capital gains first, and then up to $3,000 of ordinary income.”
He added: “Any unused loss is carried forward to the next tax year with the same netting rules. You can redeem the same security after 30 days or buy a different security (with similar exposure to the asset class “immediately. Be aware of the wash sale rules! The most common trigger for a wash sale is a dividend automatically reinvested in another account, even a spouse’s account.”
Additional contributions to your retirement savings account
Certified Financial Planner David Edmisten, Founder of Next Phase Financial Planning, LLC, mentions that “As we approach the end of the year, there are a few key things one should look at as part of their to-do list. year-end check to see if they can save on taxes.” .”
He explains, “For people who are still working, this is a great time to review their contributions to retirement savings accounts. Make sure you’ve contributed the full amount to savings plans like a 401(k) account ( k) can keep your retirement savings on track.” “
He adds: “If you are 50 or older, it is also important to see if you are able to make additional catch-up contributions to increase your retirement savings. “benefitting significantly in building his nest egg.”
Sell your mutual funds
Chris Randall, Founder and CEO of Axis Capital Management, explains why selling your mutual funds and buying ETFs could be beneficial.
He explains: “Mutual fund portfolio managers buy and sell securities to try to beat overall market performance. They also have to sell securities to meet redemptions if investors take money out of the fund. These are taxable events since they are exchanging securities for cash.” 2022, many portfolio managers sold securities purchased long ago at a lower price, creating a large capital gain. Individual mutual fund investors are irritated to pay capital gains taxes in a year of negative fund performance.
He continues: “In an ETF, on the other hand, you can exchange one basket of securities for another, which is called an in-kind transfer. This does not create a taxable event since there is no money changing hands, just a basket. titles for another. This allows the ETF to reduce the amount of tax generated in the fund. An investor can benefit from nearly identical market exposure by selling mutual funds and buying ETFs while realizing lower capital tax gains.
This post was produced by Radical FIRE and syndicated by Wealth of Geeks.
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