Tax planning may not evoke the holiday spirit, but saving money is always something to celebrate. Between shopping for gifts and decorating for the holidays, now is also a prime time to consider year-end tax moves.
While federal income tax returns aren’t due until April, there are a number of December deadlines to be aware of if you want to lower your tax bill, increase your refund or help out your future self.
"2022 presents us with many areas of opportunity and planning techniques to think about," Chloe Wohlforth, senior managing director at Angeles Wealth Management, says about optimizing tax situations and strengthening your overall financial picture.
Here are six tax moves to consider before the end of the year.
1. Take advantage of tax-loss harvesting
This year has been rough for investors, with a recent report from the Federal Reserve showing that the value of American households' stocks fell $1.9 trillion last quarter.
But that means there’s a unique opportunity to take advantage of tax-loss harvesting before the Dec. 31 deadline.
Tax-loss harvesting is when investors sell financial assets like stocks, bonds and crypto at a loss to offset either capital gains or some of their income when they file their taxes. If you have more capital losses than capital gains this year, you can use the excess losses to offset up to $3,000 of your income, lowering your taxable income for 2022. If you still have losses beyond that, you can carry them over to offset income in future tax years, but keep in mind the $3,000 limit will still apply.
After you sell these assets, you should usually plan to reinvest the money, says Veronica Willis, investment strategy analyst at the Wells Fargo Investment Institute. Keeping your money on the sidelines can cost you.
However, it’s important to note that the government prohibits investors from selling assets for tax-loss harvesting, then buying the same (or “substantially identical”) securities within 30 days of the sale. That means you have to either move your money into a different investment or wait on the sidelines for a month.
Still, advocates of tax-loss harvesting say the benefits can be worth it, especially this year, when financial markets have severely suffered.
2. Contribute to a 529 plan
Saving for a child’s college education is hard enough as it is, so you want to make sure you’re taking advantage of tax benefits while you do it. That’s where state-sponsored 529 plans come in.
These plans allow you to use the tax-free earnings and money saved to pay for qualified educational expenses, like tuition and textbooks. You can’t deduct contributions to 529 plans for federal income tax purposes, but most states allow you to deduct contributions on your state taxes as long as you contribute before the end of the year.
You can contribute up to $16,000 to a 529 in 2022 without it being considered a taxable gift.
You don't have to be the parent to contribute to someone's 529 plan. Grandparents, aunts, uncles, friends and other loved ones can give, too.
3. Increase your retirement account contributions
Saving via your retirement accounts is a way to do your future self a favor — but it can also be a smart tax move in the present. When you contribute to a plan your employer sponsors, like a 401(k), that money is typically pre-tax, which means it lowers your taxable income.
Workers with 401(k)s or 403(b)s can contribute up to $20,500 by Dec. 31 for the 2022 tax year (or $27,000 if they are age 50 or older).
Deciding whether or not to max out your 401(k) each year can be complicated and depends on your financial goals and when you’ll need your money. Due to the fairly high limits, most Americans don't max out their 401(k)s. But this could be a good time to revisit your contribution plan and determine how much you want to set aside next year.
Unlike with 401(k)s, with individual retirement accounts (IRAs), you have until Tax Day (which in 2023 is April 18) to contribute. For tax year 2022, people under 50 can contribute up to $6,000 to IRAs. The limit is $7,000 for people 50 and older.
4. Give to charity
The vast majority of taxpayers take the standard deduction instead of itemizing their returns. But if you have many deductible expenses (think mortgage interest, property taxes or medical expenses) — or perhaps if you want to donate a lot to charity — itemizing and deducting charitable contributions could be a smart year-end tax move.
You can also consider contributing to donor-advised funds, which let you add money to a fund in one tax year but spread out the donations to charities over the course of multiple years. That means you could potentially itemize your taxes in a year when you add money to the fund while taking the standard deduction in all other years.
Wohlforth says to keep in mind that people who are 70 ½ or older can donate to charities directly from their IRAs, which is a way to avoid paying taxes on withdrawals from those retirement accounts. Younger Americans aren’t eligible to make this type of tax-free donation, which is known as a "qualified charitable distribution."
Beyond these strategies, Wohlforth says it may be beneficial for itemizers to look into donating appreciated securities — like stocks whose value have gone up since you bought them — that they've owned for at least a year. This is a giving method that eliminates capital gains taxes, and you can deduct the donation from your 2022 taxes at its fair market value (which is the price it would sell at).
Note that while there was a special rule in 2020 and 2021 that allowed non-itemizers to deduct some donations to qualifying charities, that rule has expired.
5. Consider a Roth conversion
While it may not lower your next tax bill like many of these other strategies, a Roth conversion — which involves transferring money from a traditional IRA to a Roth IRA — could be a smart tax move in the long term. Unlike with traditional IRAs and 401(k)s, Roth IRAs allow investors to put in after-tax dollars that then grow tax-free.
The deadline to make a conversion is Dec. 31, and doing so when the market is down can help you save on taxes. That's because you have to pay taxes on the amount of money you convert, so when your balance is lower, so is the amount you have to pay in taxes.
A Roth conversion can make sense if you think you'll be in a higher tax bracket in the future. Note that some people conduct the conversions in stages so they don't have to pay all the income tax at once (claiming the entire balance of a traditional IRA on one year's income could bump you up to a higher tax bracket).
The move certainly isn't best for everyone, but if it's something you've been considering, now could be a good time, given that the S&P 500 is down around 16% for the year.
6. Spend FSA funds
Employees with flexible spending accounts (FSAs) through their employers should check to see if they have remaining funds available. These accounts are a way to set aside pre-tax dollars for healthcare-related expenses, but if you don't use that money, you lose it.
The deadline to spend this money is generally Dec. 31, but the IRS allows employers to offer a grace period until mid-March or the ability for employees to roll over up to $570 of unused funds into 2023. But your employer doesn't have to make these allowances, so check with them.
If you have money that you have to spend before the deadline, you can make a trip to the pharmacy and stock up on health supplies that you’ll likely need at some point down the road, like sunscreen, tampons, over-the-counter medicine and bandages. And take this time to consider whether you should adjust the amount you contribute to your FSA in the future.
Keep in mind that health savings accounts (HSAs) don't have spending deadlines.