Do you feel the time ticking away?

2023 is quickly approaching, and now is the time to do some year-end tax planning.

Did your business have a good year?

Did you get hit with some unexpected expenses, and now you’re rebounding from the recent losses?

Did you just launch your business, and you’re struggling to make it off the ground?

Whatever your situation, there’s time before the end of the year to make moves that could save you a bundle.

Want some tax planning strategies that could result in a tax liability reduction?

Of course, you do.

Defer income – yes or no?

You report income in the year it is received. Wouldn’t you be relieved if you could push some of the related taxes to next year?

If so, you have a few options.

Working as an employee of someone else makes it hard to postpone wage and salary income.

Still, you may be able to defer a year-end bonus to next year if your company agrees to it.

You have more leeway when you are self-employed.

Delaying billings until late December can ensure that you won’t receive payment until next year.

However, with future tax rates likely to be higher, it could be beneficial to accelerate income into 2022 rather than wait until 2023.

You also might not want to defer income if you think you will be in a higher tax bracket next year.

Or if you have racked up unexpected losses this year, you can afford to show more revenue now.

Example:

March through June was a nightmare. Your revenue was nearly non-existent, but you still had bills to pay.

Luckily, things have picked up, and fingers crossed, they will remain that way through the end of the year.

Keeping as much income in 2022 when you have plenty of expenses to offset it makes more sense than deferring.

Save money this year by accelerating your expenses.

Suppose your business is taxed on a cash basis.  

That means that you claim income and expenses when received or paid, not when they are incurred.

In that case, you can accelerate expenses by paying a bill not due until early next year by the end of December.

Write the checks on December 31st, and you are entitled to a deduction even if the check clears your bank in 2023.

Stocking up on office supplies is an excellent place to grab a few extra deductions this year.

Also, consider paying bonuses to your employees in December rather than after the first of the year.

Example:

On December 20th, you receive bills for your utilities and telephone expenses. They both have due dates of January 10th, 2023.

Instead of waiting until January, write the checks dated December 31st.

Stick them in the mail between the 31st and the 10th of January, and take a 2022 deduction.

Sell loser investments to offset gains.

Did you feel the pain of a few of your investments go south this year?

There is a silver lining: those underachievers can come in handy when it’s time to reconcile with the IRS. 

Consult with your financial advisor to see if any stocks worth selling before December 31st are down in value. The realized loss can offset any gains you have. 

We refer to this strategy as tax-loss harvesting. 

Investments that are in the red can be your ticket to a lower tax bill — up to $3,000 a year.

Tax-loss harvesting is a way to cut your tax bill by selling investments at a loss to offset the capital gains taxes on investments that you sold for a profit.

You can always re-purchase the stock after 30 days if you think it has a chance of rebounding and growing.

Example:

Let’s say you have $10,000 in capital gains on certain stocks and funds in a taxable investment account. 

To minimize the tax liability from those gains, you sell other assets that will generate a loss. 

If those losses total $5,000, it will cut your capital gains—and therefore your capital gains tax—in half.

Utilize retirement accounts.

Retirement accounts provide the most tax savings for taxpayers each year.

They can grow to substantial sums because they compound over time yet defer taxes now.

Company-sponsored 401(k) plans are ideal because employers often match your contributions.

Try to maximize your 401(k) contribution and put in the full amount of money allowed ($20,500 for 2022, $27,000 if you are age 50 or over). 

I know you’re thinking, “Whoa, that’s a lot of money!”

I get you.

If that amount isn’t in your budget, try to contribute at least the amount your employer will match.

What if your employer doesn’t offer a 401(k) plan? 

Contribute on your own to a traditional or Roth IRA. 

IRAs have contribution limits too. 

For 2022, the limit on annual contributions to an IRA is $6,000, plus an additional $1,000 in catch-up contributions if you’re 50 or older. 

With traditional IRAs, you don’t have to contribute before the end of the year to have the 2020 tax year’s contribution count—you have until April 18th, 2023, to make IRA contributions for 2022.

Example:

Suppose your employer matches 3% of your salary up to the amount you contribute. 

In that case, you need to do everything possible to pay in 3%.

Make the most of your home with tax deductions. 

Along with the joy you feel owning your own home, home ownership also comes with a few tax breaks.

To maximize these benefits, especially when bunching deductions(more on bunching to follow), make your January mortgage payment by December 31st and deduct the mortgage interest on your upcoming tax return. 

Tip:

You want to make sure you don’t cut it too close in making the early payment.

Mail the check in plenty of time for it to arrive at your lender by year’s end. When paying online, be sure you make the electronic transaction in time to have it credited to this tax year’s payment amount.

The added interest must show up on the annual statement (usually a Form 1098 or an IRS-acceptable substitute).

You’ll receive the statement from your lender in late January detailing your deductible mortgage activity.

Also, make sure to pay your 2nd annual real estate tax installment in December as well.

Pay college costs early.

If your income is below the limits and you can deduct college costs, you should pay any invoices before December 31st, even if they are for 2023 tuition. 

Here’s how much the deduction is worth:

The American Opportunity Tax Credit

• $2,500 per student, calculated as 100% of the first $2,000 in college costs and 25% of the next $2,000., if your MAGI(modified adjusted gross income) was less than $80,000 as a single filer or $160,000 as married filing jointly
• Lower-income taxpayers also benefit because up to 40% of the credit (or $1,000) is refundable, meaning that you can expect a check from the government if you owe no taxes.
• The credit is gradually reduced at higher income levels.

The Lifetime Learning Credit

• The maximum annual credit is $2,000, calculated as 20% of the first $10,000 in qualifying educational expenses.
• There is no limit on the number of years of higher education for which you can claim it.
• Beginning in 2021, the Lifetime Learning Credit’s income limits were increased to align with those of the American Opportunity Tax Credit.

Married couples filing separately are ineligible for the tuition and fees deduction.

In addition, you cannot claim the American Opportunity Credit and the Lifetime Learning Credit for the same student in the same year.

Perform a withholding check-up.

Do yourself a favor and look at your last paycheck.

Check to see how much income tax has been withheld so far.

If you’ve had too much or too little tax withheld, there’s still time to adjust your withholding for the rest of the year.

Since you probably only have a couple of pay periods left, act as soon as possible to have an impact on your overall 2022 withholding.

Having a large balance due in April can result in significant underpayment penalties for not having enough taxes paid in

Large refunds aren’t recommended either. 

You could do much more with that money than allowing the government to keep it during the year. 

To adjust your withholding, you must complete form W-4 and submit it to your employer. It can become complicated if you earn income from several sources or have dependents.

For more on filling out a W-4, read this: How the New W-4 Can Save You Taxes.

Tip:

Use the IRS online tool for best results. This tool will estimate your 2020 income tax. 

The Tax Withholding Estimator compares that estimate to your current tax withholding and can help you decide if you need to change your withholding with your employer.

Don’t overlook those last estimated payments.

Make your estimated tax payments on time.

Fourth-quarter payments are due January 17th, 2023.

We recommend making your state payment by December 31st if you haven’t yet reached the $10,000 limit for deductible state taxes.

Reinvest back into your business.

As always, reinvesting capital back into your business benefits your business and lowers your tax burden when you are profitable.

Thinking about buying equipment to use in your business–whether it be a car, computers, software, or anything else?

Do it by the end of the year.

Most likely, you’ll be able to deduct the entire amount instead of depreciating it over several years.

The good thing is that you still have time to purchase these items for 2022.

You are entitled to the accelerated deduction if they are in your physical possession as of December 31st.

Example:

If you purchase a $50,000 piece of equipment in 2022 and are in the 35% tax bracket, you can depreciate that entire piece of equipment in 2022 so that your tax deduction is $17,500.

Play the itemized vs. standard deduction game.

Itemizing is more challenging to do these days with the current high standard deduction amounts. 

Since 2019, approximately 75% of taxpayers have taken the standard deduction.

However, additional tax deductions are available if you can itemize. 

Your qualifying expenses must exceed the standard deduction ($12,950 if you are single or $25,900 if you’re married filing jointly) to itemize and maximize your deductions.

Consult with your tax advisor.

They will determine if you can itemize based on your anticipated deductible expenses.

If you’re on the itemize-or-not borderline, your year-end strategy should focus on bunching. 

Bunching means you time expenses to create lean and fat years. 

In one year, you cram in as many deductible expenses as possible.

The goal is for your expenses to surpass the standard deduction amount and claim a more significant write-off.

This strategy could even help your state tax returns.

If you are bunching deductions, you hold off on some deductible expenses to stay below the standard deduction amount in alternating years.

You don’t lose out in those “lean” years since you are allowed credit for the full standard deduction regardless of how much you spend. 

In these years, year-end planning pushes as many deductible expenses as possible into the following year when they’ll have more value.

Example:

In December 2022, pay as many expenses as possible before the end of the year.

Pay large medical bills, and make charitable contributions. Also, make sure all your home real estate taxes are paid.

Even make your January mortgage payment before December 31st.

In December 2023, do the opposite and take the standard deduction, saving as many expenses for 2024 as possible.

Once 2024 hits, you will again “bunch” your deductions.

Take action now.

That clock is still ticking.

Before you get too far into the holiday craziness, set a day to review these tax tips and take action on any that apply to you.

Tax breaks are to be had, and how awesome would it feel to get your tax liability down to zero(or at least as close as possible)?

You know you want to.

Wrap up 2022 on a solid note financially.

Take advantage of every opportunity to reduce your tax liability.

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