Unless you’re a CPA, chances are tax season is not your favorite time of year. So why are we bringing it up now, at the most wonderful time of the year? Well, there are multiple end-of-year tax moves to make now that can mean filing season may be easier and more affordable.
Read on to learn some smart year-end tax tips to make before next April arrives.
Why End-of-Year Tax Prep Is Important
The end of the year can be an ideal time to get your affairs in order for the upcoming tax season, especially when it comes to reducing your tax burden. One way to do that is through tax-loss harvesting (we’ll explore in detail below). This and other financial moves can be complicated and may require additional preparation or the assistance of a financial planner, which is why an early start can be important.
Ready to learn the details? Here are eight tax moves to make by the end of the year that could save you time and money when April 15 rolls around.
1. Look at Tax Bracket Changes
The Internal Revenue Service can widen tax brackets, meaning you could see lower income taxes this year along with an increased standard deduction. For example, for tax year 2022 (filing in April 2023), the standard deduction for married couples is $25,900; next year it will be $27,700, an increase of $1,800. For single filers, it will increase by $900 from $12,950 in tax year 2022 to $13,850 in tax year 2023.
2. Grab All Available Itemized Deductions
It’s also a great time to review what itemized deductions you may have. Beyond state and local packages, you’ll also want to consider any medical expenses, charitable donations, home mortgage interest, or any losses you may have incurred as the result of a natural disaster or theft.
3. Review Your Contribution Limits
Some of the contributions you can make include putting money in your health savings account (HSA), 529 college savings account, and your IRA for 2022. You’ll have until April 18, 2023, to make these contributions. Making them earlier in the year can give you more time to grow your money on a tax-deferred basis.
Contributions to a traditional IRA or HSA often can reduce your taxable income, as long as you are eligible to contribute and to take a deduction. And while you can also contribute to a Roth IRA, your contributions are aggregated and can’t exceed the annual limit.
Here are contribution limits for tax year 2022 as well as what to expect for 2023:
• IRAs: $6,500 for tax year 2023, up from $6,000 for 2022. Those over 50 can contribute an additional $1,000 per individual.
• HSAs: Contribution limits for 2022 are $3,650 (going up to $3,850 in tax year 2023) for individual coverage. Family coverage is $7,300 in 2022, rising to $7,750 in 2023, with those over 55 eligible to make $1,000 more in catch-up contributions.
• 529s: Contributing to a 529 college savings account for yourself, children or even grandchildren will be limited to $17,000 for individuals ($34,000 per married couple filing jointly) for any number of recipients in 2023.
4. Consider Tax-Loss Harvesting
Tax-loss harvesting can be a great tool to offset losses in non-retirement accounts. Simply put, tax-loss harvesting allows you to use realized losses to offset any gains. So, if you have investments that are below cost basis, you may want to discuss your situation with your financial planner or tax advisor to see if tax-loss harvesting is a good option.
5. Review Your Savings
Were you able to save some money over the last year but haven’t invested it yet? If it’s just sitting in your savings account, now may be the time to consider some tax-efficient investing.
When deploying a tax-efficient investment strategy, it’s crucial to know how an investment is going to be taxed because ideally you’d want more tax-efficient investments in a taxable account. Conversely, you may want to hold investments that can have a greater tax impact in tax-deferred and tax-exempt accounts, where investments can grow tax-free.
Next, it is helpful to know that some investment types are inherently more tax-efficient than others. That insight can aid you in making the best investment choices for the type of investment account that you have. For example, ETFs’ tax efficiency is considered superior to that of mutual funds because they don’t trigger as many taxable events.
Investors can trade ETFs shares directly, while mutual fund trades require the fund sponsor to act as a middle man, activating a tax liability.
Quick Money Tip: If you’re saving for a short-term goal — whether it’s a vacation, a wedding, or the down payment on a house — consider opening a high-yield savings account. The higher APY that you’ll earn will help your money grow faster, but the funds stay liquid, so they are easy to access when you reach your goal.
6. Consider a Roth Conversion
Do you have a traditional IRA and want to convert it into a Roth IRA instead for tax purposes? Deciding to convert a traditional IRA to a Roth IRA comes down to a few factors, all of which are personal to each individual investor. This may make it important to weigh the pros and cons carefully. You may want to discuss this kind of year-end tax move with a financial advisor before making a decision.
That said, to convert into a Roth IRA you must first put money into a traditional IRA account. If you don’t already have one, you will need to open one.
An IRA rollover can happen a few ways:
• Via an indirect rollover, where the owner of the account receives a distribution from a traditional IRA and can then contribute it to a Roth IRA within 60 days
• Via a trustee-to-trustee, or direct rollover, where an account owner tells the financial institution currently holding the traditional IRA assets to transfer an amount directly to the trustee of a new Roth IRA account at a different financial institution
• Via a same trustee transfer, used when a traditional IRA is housed in the same financial institution of the new Roth IRA. The owner of the account alerts the institution to transfer an amount from the traditional IRA to the Roth IRA.
7. Perform a Financial Checkup
There’s a good chance, over the course of the past year, at least one major aspect of your life has changed. This may have included a new job, a new family member, or a new home.
If you’ve experienced changes in your life, consider taking some time now to reevaluate your financial goals, as well as your estate planning. For example, owning a home and being responsible for a mortgage can impact your discretionary spending. Similarly, if you recently became a parent or pet owner, you may think about adjusting your finances to prepare for the added expenses.
Using an end-of-year checklist can help you re-prioritize and re-allocate before tax time arrives.
8. Top up Your 401(k)
The more you contribute to your 401(k) account, the lower your taxable income is in that year, so if you have not reached your maximum contribution, now is the perfect time to do so. If you contribute 15% of your income to your 401(k), for instance, you’ll only owe taxes on 85% of income. Let’s say your annual income is $50,000. If you contribute 15% of your salary annually, $7,500 will be deposited into your 401(k) account and you will be taxed on $42,500. Total tax savings: $2,100.
To max out a 401(k) for 2022, an employee would need to contribute $20,500 in salary deferrals — or $27,000 if they’re over age 50 and playing catch-up. Some investors might think about maxing out their 401(k) as a way of getting the most out of this retirement savings option. Others may want to put the money elsewhere. Again, talking with a financial professional can help you weigh the implications of these end-of-year money moves.
The end of the year is an ideal time to get your affairs in order for the upcoming tax season in April. Specifically, it may be in your best interests to find ways to mitigate your tax bill. You might rethink your retirement-savings vehicles or try tax-loss (selling securities at a loss in order to reduce your tax bill), for instance.
As you are thinking about your finances, perhaps you can take a minute to look at your banking partner. Opening an online bank account with SoFi is one way to help your money grow faster, thanks to our no-fee policy and competitive APY. Plus our Checking and Savings account lets you spend and save in one convenient place.
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SoFi members with direct deposit activity can earn 4.60% annual percentage yield (APY) on savings balances (including Vaults) and 0.50% APY on checking balances. Direct Deposit means a deposit to an account holder’s SoFi Checking or Savings account, including payroll, pension, or government payments (e.g., Social Security), made by the account holder’s employer, payroll or benefits provider or government agency (“Direct Deposit”) via the Automated Clearing House (“ACH”) Network during a 30-day Evaluation Period (as defined below). Deposits that are not from an employer or government agency, including but not limited to check deposits, peer-to-peer transfers (e.g., transfers from PayPal, Venmo, etc.), merchant transactions (e.g., transactions from PayPal, Stripe, Square, etc.), and bank ACH funds transfers and wire transfers from external accounts, do not constitute Direct Deposit activity. There is no minimum Direct Deposit amount required to qualify for the stated interest rate.
SoFi members with Qualifying Deposits can earn 4.60% APY on savings balances (including Vaults) and 0.50% APY on checking balances. Qualifying Deposits means one or more deposits that, in the aggregate, are equal to or greater than $5,000 to an account holder’s SoFi Checking and Savings account (“Qualifying Deposits”) during a 30-day Evaluation Period (as defined below). Qualifying Deposits only include those deposits from the following eligible sources: (i) ACH transfers, (ii) inbound wire transfers, (iii) peer-to-peer transfers (i.e., external transfers from PayPal, Venmo, etc. and internal peer-to-peer transfers from a SoFi account belonging to another account holder), (iv) check deposits, (v) instant funding to your SoFi Bank Debit Card, (vi) push payments to your SoFi Bank Debit Card, and (vii) cash deposits. Qualifying Deposits do not include: (i) transfers between an account holder’s Checking account, Savings account, and/or Vaults; (ii) interest payments; (iii) bonuses issued by SoFi Bank or its affiliates; or (iv) credits, reversals, and refunds from SoFi Bank, N.A. (“SoFi Bank”) or from a merchant.
SoFi Bank shall, in its sole discretion, assess each account holder’s Direct Deposit activity and Qualifying Deposits throughout each 30-Day Evaluation Period to determine the applicability of rates and may request additional documentation for verification of eligibility. The 30-Day Evaluation Period refers to the “Start Date” and “End Date” set forth on the APY Details page of your account, which comprises a period of 30 calendar days (the “30-Day Evaluation Period”). You can access the APY Details page at any time by logging into your SoFi account on the SoFi mobile app or SoFi website and selecting either (i) Banking > Savings > Current APY or (ii) Banking > Checking > Current APY. Upon receiving a Direct Deposit or $5,000 in Qualifying Deposits to your account, you will begin earning 4.60% APY on savings balances (including Vaults) and 0.50% on checking balances on or before the following calendar day. You will continue to earn these APYs for (i) the remainder of the current 30-Day Evaluation Period and through the end of the subsequent 30-Day Evaluation Period and (ii) any following 30-day Evaluation Periods during which SoFi Bank determines you to have Direct Deposit activity or $5,000 in Qualifying Deposits without interruption.
SoFi Bank reserves the right to grant a grace period to account holders following a change in Direct Deposit activity or Qualifying Deposits activity before adjusting rates. If SoFi Bank grants you a grace period, the dates for such grace period will be reflected on the APY Details page of your account. If SoFi Bank determines that you did not have Direct Deposit activity or $5,000 in Qualifying Deposits during the current 30-day Evaluation Period and, if applicable, the grace period, then you will begin earning the rates earned by account holders without either Direct Deposit or Qualifying Deposits until you have Direct Deposit activity or $5,000 in Qualifying Deposits in a subsequent 30-Day Evaluation Period. For the avoidance of doubt, an account holder with both Direct Deposit activity and Qualifying Deposits will earn the rates earned by account holders with Direct Deposit.
Members without either Direct Deposit activity or Qualifying Deposits, as determined by SoFi Bank, during a 30-Day Evaluation Period and, if applicable, the grace period, will earn 1.20% APY on savings balances (including Vaults) and 0.50% APY on checking balances.
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