IRS tax planning just got more lucrative: How to save a bundle on your tax return


By Bill Bischoff

Here are simple ways to lower your tax bill that can be too easily overlooked.

This is the second part of our list of suggested year-end strategies. Part 1 deals with the federal standard deduction game and the management of capital gains and losses.

The tax environment becomes more worker-friendly.

With the end of the year fast approaching, it’s time to consider measures that will reduce your tax bill for 2022 and hopefully also provide you with tax savings in the years to come. come.

While the fate of the economy and the stock market remains uncertain, it now appears that there will be no major tax increases this year or next.

Assuming this turns out to be true, the year-end tax planning environment is much better than it was this time last year.

In fact, 40 years of high inflation prompted the Internal Revenue Agency to release new tax rates and deductions for next year this week.

The standard deduction for individuals and married individuals filing separately will be $13,850 for 2023. This represents an increase of $900 from the standard deduction of $12,950 for next tax season.

For married couples filing jointly, the payment jumps to $27,700 for 2023. This is an increase of $1,800 from the standard deduction of $25,900 set for the upcoming tax year. Learn more here.

With all that in mind, here are some tax saving ideas to consider.

Reorganize your portfolio

If you are charitable: sell losing stocks and donate the resulting money; donate stock to winners If you would like to donate to charity or loved ones.

You can do this in conjunction with an overall overhaul of your stock and taxable stock mutual fund portfolios. Donate according to the following smart tax principles.

Charitable donations

Do not give away losing stocks (which are currently worth less than what you paid). Instead, sell the shares and recognize the resulting tax loss.

Then you can donate the proceeds of the cash sale to charity and claim the resulting tax deduction, assuming you itemize the deductions.

Following this strategy provides a double tax benefit: tax-saving capital losses and tax-saving charitable deductions. On the other hand, donate winning stocks instead of donating cash.

Donations of publicly traded stocks held for more than one year result in charitable deductions equal to the total current market value of the stocks at the time of donation, assuming you itemize.

Plus, when you donate winning shares, you escape any capital gains tax. So this idea is also a double tax saver: you avoid capital gains tax and you get a tax-saving charity deduction.

Gifts to loved ones

The principles of tax-efficient charitable giving also apply to gifts to relatives and other loved ones. Give shares to the winners.

Most likely, the gift recipient will pay a lower tax rate than you would if you sold the shares.

Sell ​​losing stocks and recover the resulting tax losses. Then give the proceeds of the sale in cash to your loved ones.

Charitable donations from your IRA

IRA owners and beneficiaries who have reached age 70.5 are permitted to make cash donations totaling up to $100,000 to IRS-approved public charities directly from their IRAs.

These so-called Qualified Charitable Distributions, or QCDs, are exempt from federal income tax for you, but you don’t get an itemized charitable write-off on your Form 1040.

That’s okay, because QCD tax-free treatment is equivalent to an immediate 100% federal income tax deduction without having to worry about restrictions that can delay itemized charitable write-offs.

QCDs also have other tax advantages. Contact your tax advisor if you would like to hear about it.

If you want to take advantage of the QCD strategy for 2022, you will need to arrange with your IRA trustee or custodian to have the money paid out to one or more eligible charities before the end of the year.

Consider a Roth IRA Conversion

The best scenario for converting a traditional IRA to a Roth account is when you expect to be in the same tax bracket or higher during your retirement years.

Given the huge federal debt, currently about $31 trillion or about $94,000 for every man, woman, and child, that’s a reasonable expectation.

However, there is a tax cost to the conversion, as a conversion is treated as a taxable liquidation of your traditional IRA followed by a non-deductible contribution to the new Roth account.

If you don’t convert until a future year, the tax cost could be higher, depending on what happens with tax rates.

After conversion, all income and gains that accumulate in the Roth account, as well as all withdrawals, will be free of federal income tax – assuming they are qualified withdrawals.

In general, qualified withdrawals are those made after: (1) you have had at least one Roth account open for more than five years and (2) you have reached the age of 59½, become disabled or have died .

With qualifying withdrawals, you (or your heirs in the event of your death) avoid having to pay higher tax rates that may otherwise apply in future years.

Although the current tax impact of a Roth conversion is not welcome, it could be a relatively small price to pay for future tax savings.

Prepay college bills

If your income level in 2022 qualifies you for the American Opportunity College Credit (maximum $2,500 per eligible student) or Graduate Credit for Lifetime Learning (maximum $2,000 per family) , consider prepaying tuition that is not due until early 2023 if it would result in a larger credit on that year’s Form 1040.

You can claim a 2022 credit based on tuition prepayment for academic terms that begin January through March of next year. For 2022, both credits are phased out (reduced or completely eliminated) if your Modified Adjusted Gross Income (MAGI) is too high.

The phase-out range for unmarried people is between MAGI of $80,000 and $90,000. The range for married co-filers is between MAGI of $160,000 and $180,000. MAGI stands for “regular” AGI, based on your Form 1040, plus some tax-exempt income from outside the United States that you probably don’t have.

Defer revenue to next year

It will be beneficial to defer some taxable income from this year to next year if you think you will be in the same tax bracket or in a lower tax bracket in 2023.

For most people, this will likely be the case, as next year’s federal income tax bracket boundaries will be increased by about 7% from this year. See my previous column.

For example, if you are in business for yourself and a cash taxpayer, you can easily defer some taxable income until the end of that year to send some customer invoices. This way, you won’t receive payment for them until early 2023.

You can also defer taxable income by accelerating certain deductible business expenses this year.

Both measures will defer this year’s taxable income to next year, when you expect it to be taxed at the same rate or at lower rates.

The last word

Fortunately, the picture for year-end tax planning is much clearer this year than it was at this time last year. So, the tax saving ideas we’ve covered should work.


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-Bill Bischoff


(END) Dow Jones Newswire

10-20-22 1649ET

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