Marjolein Dilven, Wealth of Geeks
After a year of rising inflation, increasing interest rates, and unrest in the stock market, Americans are turning every stone to see where they can save money for holiday gifts.
While it may still seem far away, experts say that you can boost your financial position by optimizing your taxes in 2022. Although it won’t make you rich overnight, you can trim your tax bill going into 2023.
Think about if these strategies will work for your situation, and when in doubt, consult your CPA or tax consultant to help you with your projections.
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Donor-Advised Fund
Greg Wilson, a 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 favorite charities over time.
Greg explains, “DAFs are an easy and efficient way to lower taxes while supporting the causes you care about. When you contribute to a DAF, you receive an immediate tax deduction for the full amount of your contribution. The funds in the DAF grow tax-free, and you can recommend grants from the account to your favorite charities over time.”
DAFs are especially popular during year-end giving because they offer a way to lower your taxes while supporting the causes you care about. By contributing to a DAF before December 31st, you can receive 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.”
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Health savings account
Riley Adams, a Certified Public Account, shares his expertise. Riley says, “My favorite year-end tax tip is to contribute to a health savings account and invest money toward future healthcare needs or your eventual retirement.”
When going more into detail on the advantages of health savings accounts, Riley explains, “The account carries three tax advantages, combining to serve as the most tax-efficient account in America: (1) you don’t pay taxes on the income contributed to the account, (2) you don’t pay taxes on income and gains realized on investments inside the account, and (3) you don’t pay taxes on withdrawals if used for qualified healthcare expenses.”
He added, “You can only contribute to the account if you also have a qualifying high-deductible health plan, and contributions can be invested over long periods 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 as you would a traditional IRA.”
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Tax-loss harvesting
Allen Mueller, a Chartered Financial Analyst and Master in Business Administration, recommends looking into tax-loss harvesting.
He explains, “Tax-loss harvest (TLH) positions (investments) in a taxable account with unrealized losses. These losses will first offset realized capital gains and then up to $3,000 in ordinary income.”
He added, “Any unused loss gets rolled over to the next tax year with the same offset rules. You can buy back the same security after 30 days or buy a different security (with similar asset class exposure) immediately. Be aware of the wash sale rules! The most common trigger for a wash sale is an automatically reinvested dividend in another account - even a spouse’s account.”
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Extra contributions to your retirement savings account
Certified Financial Planner David Edmisten, founder of Next Phase Financial Planning, LLC, mentions that “As year-end approaches, there are a few key items that one should review as part of their year-end checklist to see if they can save on taxes.”
He explains, “For people still working, this is a great time to review one’s contributions to retirement savings accounts. Making sure you’ve contributed the full amount to savings plans like a 401(k) account can keep your retirement savings on track.”
He adds, “It’s also important if you’re 50 or older to see if you’re able to make additional catch-up contributions to boost your retirement savings. 401(k) participants 50 or older can contribute an additional $6,500 for 2022, significantly benefiting building one’s nest egg.”
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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 and beat the general market performance. They also must sell securities to meet redemptions if investors pull cash from the fund. These are taxable events since they are exchanging securities for cash. In 2022, many portfolio managers sold securities originally purchased long ago at a lower price, creating a large capital gain. Individual mutual fund investors are irritated to be paying capital gains taxes in a year where the fund’s return has been negative.”
He continues, “In an ETF, on the other hand, you can redeem a basket of securities for another, referred to as an in-kind transfer. That does not create a taxable event since there is no cash changing hands, simply one basket of securities for another. It allows the ETF to reduce the amount of taxes generated in the fund. An investor can receive almost identical market exposure by selling mutual funds and buying ETFs while experiencing lower capital gains taxes.”
