If you are anything like most people around tax time, you are simply happy to file your taxes on time, hopefully not paying more than you did last year, all while praying that you haven’t missed some easy tax savings somewhere.
Fortunately, there are several tax planning strategies you may want to consider in 2022. Of course, you should speak with your CPA, financial, and legal advisor before doing anything.
Strategy #1 – Maximize the tax benefits of giving. Often we tell people, “There are no silver bullets in tax planning; it’s about doing the right things year after year.” This is not entirely true, as there are in fact two “silver bullets” that we are aware of.
The first is called a Donor Advised Fund (DAF), which is a “charitable brokerage account.” A DAF allows you to “lump” your charitable giving into a single year to generate a larger tax deduction (valuable right now with such a high standard deduction).
As an example, let’s say you plan to give your church $1,000 a year. With a DAF, you can move multiple years’ worth of donations (let’s say 5) to your DAF this year. You’ll get a $5,000 deduction in 2022 (in our example), possibly pushing you above the standard deduction, but you can still direct just $1,000 a year to your church/synagogue from your DAF.
Additionally, you could donate appreciated stock to your DAF, and you’ll sidestep capital gain taxes on those gifted shares as well (restrictions apply).
Strategy #2 – Tax Loss Harvesting. This strategy involves selling investments that are at a loss and repurchasing them after 30 days, capturing a loss (and tax benefit) in the short term, while keeping to your long-term investment strategy.
You may even consider purchasing an alternative investment for the 30-day period so you are not “out of the market” – although it must be materially different from the investment you sold.
Strategy #3 – Roth Conversions. It may be counterintuitive, but one of the best ways to reduce your taxes over time is to pay more taxes in your early years of retirement (before Social Security and Required Minimum Distributions kick in).
A Roth conversion allows you to move funds from your traditional IRA to your Roth IRA. The funds that are “converted” are taxed as income, but in the Roth, they will continue to grow tax free and are distributed tax free in the future.
Roth conversions are perhaps our best tool to decrease tax over time by paying tax at a lower tax rate earlier in life for the potential for tax-free growth thereafter.
If you’d like to discuss these strategies in more detail, schedule a complimentary call with one of our advisors or leverage our tax preparation checklist to make sure you have what you need to file your returns.
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