Tax Guy: 7 ways save a bundle on your tax bill — and position yourself for future savings

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This is Part Two of our list of suggested year-end strategies. Part 1 discusses gaming the federal standard deduction, and managing capital gains and losses.

The tax environment is getting friendlier for workers.

With year-end rapidly approaching, it’s time to consider moves that will lower your 2022 tax bill and hopefully position you for tax savings in future years too. 

While the fates of the economy and the stock market remain uncertain, it now appears that there won’t be any significant tax increases this year or next year.

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

While the fates of the economy and the stock market remain uncertain, it now appears that there won’t be any significant tax increases this year or next year.

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

The standard deduction for individuals and married people filing separately will be $ 13,850 for 2023. That’s up $ 900 from the $ 12,950 standard deduction for the upcoming tax season.

For married couples filing jointly, the payout climbs to $ 27,700 for 2023. That’s a $ 1,800 increase from the $ 25,900 standard deduction set for the upcoming tax year. Read more on that here.

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

Revamp your portfolio

If you’re charitably inclined: sell loser stocks and give away the resulting cash; give away winner shares If you want to make gifts to charities or loved ones.

You can do this in conjunction with an overall revamping of your taxable account stock and equity mutual fund portfolios. Make gifts according to the following tax-smart principles.

Gifts to charities

Don’t give away loser shares (currently worth less than what you paid for them). Instead, sell the shares and book the resulting tax-saving capital loss. 

Then you can give the cash sales proceeds to charity and claim the resulting tax-saving charitable write-off, assuming you itemize deductions. 

Following this strategy delivers a double tax benefit: tax-saving capital losses plus tax-saving charitable deductions. On the other hand, donate winner shares instead of giving away cash. 

Donations of publicly traded shares owned for over a year result in charitable deductions equal to the full current market value of the shares at the time of the gift, assuming you itemize. 

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

Gifts to loved ones

The principles for tax-smart gifts to charity also apply to gifts to relatives and other loved ones. Give away winner shares. 

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

Sell loser shares and collect the resulting tax-saving capital losses. Then give the cash sales proceeds to loved ones.

Charitable donations from your IRA

IRA owners and beneficiaries who have reached age 70½ are permitted to make cash donations totaling up to $ 100,000 to IRS-approved public charities directly out of their IRAs. 

These so-called qualified charitable distributions, or QCDs, are federal- income-tax-free to you, but you get no itemized charitable write-off on your Form 1040. 

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

QCDs have other tax advantages too. Contact your tax adviser if you want to hear about them. 

If you’re interested in taking advantage of the QCD strategy for 2022, you will need to arrange with your IRA trustee or custodian for money to be paid out to one or more qualifying charities before year-end.

Consider a Roth IRA conversion

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

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

However, there’s a tax cost for converting, because 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 some future year, the tax cost could be higher, depending on what happens with tax rates. 

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

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

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

With qualified withdrawals, you (or your heirs if you pass on) avoid having to pay higher tax rates that might otherwise apply in future years. 

While the current tax hit from a Roth conversion is unwelcome, it could be a relatively small price to pay for future tax savings.

Prepay college bills

If your 2022 income level will allow you to qualify for the American Opportunity college credit (maximum of $ 2,500 per eligible student) or the Lifetime Learning higher education credit (maximum of $ 2,000 per family), consider prepaying college tuition bills that are not due until early 2023 if that would result in a bigger credit on this year’s Form 1040. 

You can claim a 2022 credit based on prepaying tuition for academic periods that begin in 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 individuals is between MAGI of $ 80,000 and $ 90,000. The range for married joint-filers is between MAGI of $ 160,000 and $ 180,000. MAGI means “regular” AGI, from your Form 1040, increased by certain tax-exempt income from outside the U.S. which you probably don’t have.

Defer income into next year

It will pay to defer some taxable income from this year into next year if you believe you’ll be in the same or lower tax bracket in 2023. 

For most folks, that’s likely to be the case because the borders for next year’s federal income tax brackets will be increased by about 7% compared to this year. See my earlier column.

For example, if you’re in business for yourself and a cash- method taxpayer, you can easily postpone some taxable income by waiting until late this year to send out some client invoices. That way, you won’t receive payment for them until early 2023. 

You can also defer taxable income by accelerating some deductible business expenditures into this year. 

Both moves will postpone taxable income from this year until next year when you believe it will be taxed at the same or lower rates.

The last word

Thankfully, the year-end tax planning picture 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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