Give Yourself the Gift of Tax Savings This Year

 In News, Small Business, Taxes

It is officially that time of year – gift shopping, finalizing holiday travels, and most importantly: optimizing your financial plan. While there’s never a bad time for financial planning, many tax saving opportunities must be taken advantage of before December 31st.

Take Your Required Minimum Distributions (RMDs):
If you are 72 or older (including if you turn 72 by December 31, 2022) or have an inherited IRA, be sure to take your RMD before December 31st. RMDs are required by federal law and are formulated based on your IRA account value at the beginning of the year and the account owner’s age. This law means business, too – you’ll be paying a 50% penalty tax every year you fail to take out the distribution. That means a $10,000 RMD in 2022 will result in a $5,000 penalty if not taken before year-end. If you currently have an IRA with River Capital Advisors, know that we will contact you soon if your RMD hasn’t already been satisfied for the year.

Plan Your Giving:
According to a study completed by GivingUSA in 2019 (1), individuals donated over $309 billion to charitable organizations across the U.S. Individuals who donate a material amount, generally over $5,000 per year, may have tax-saving opportunities available to them thanks to their charitable habits. IRA owners may want to utilize Qualified Charitable Distributions to reduce the taxable portion of their RMD, while taxpayers who typically don’t have quite enough to itemize their deductions may want to consider a Donor Advised Fund or donating appreciated stock from a taxable account. Donations must be complete by December 31st to count towards your 2022 tax return, so plan accordingly.

Make Final Contributions to Your Tax-Advantaged Accounts:
Funding tax-advantaged accounts can make a big difference in retirement planning and should play a key role in your financial plan. We generally encourage clients to prioritize contributions to employer plans and health savings accounts (HSA). Some account types allow you to make 2022 contributions up until the earlier of the tax filing deadline (April 18th in 2023) or when you file your return. Some contribution types are allowed after April 18th if you file an extension.

2022 Contribution Limits:

  • Health Savings Accounts (HSAs) – $3,650 for self-only coverage, $7,300 for families
    • Additional $1,000 for those 55 and older
  • 401(k)s & Other Elective Deferral Plans – $20,500
    • Additional $6,500 for those 50 and older
  • Individual Retirement Accounts (IRAs) – $6,000
    • Additional $1,000 for those 50 and older
  • Small Business Retirement Plans – Amount varies
    • Catch-up amount varies for those 50 and older

The amount of contributions you can make to a tax-advantaged account may be limited based on your income level. We regularly discuss with clients the income limitations for different contribution types as part of optimizing their tax planning. If you overfunded your tax-advantaged account, make sure to contact your advisor or account custodian prior to year-end to correct the over-funding and avoid penalties this tax season.

Consider Other Strategies:
There are many tax planning strategies that can help both individuals and business owners. Some items to consider include:

  • Are you receiving all of the credits and deductions that you are entitled to as an individual taxpayer?
  • Do you know if you have structured your business to optimize the amount of taxes you are paying?
  • If you own your business, have you setup the most generous retirement savings plan available to you?

As part of our financial planning process, we help clients optimize their tax planning to help them achieve their goals and reduce the amount of taxes they pay.

Get Ready for 2023:
2023 is bringing with it significant increases to IRS limitations on tax-advantaged savings accounts, averaging an 8% increase in allowed contributions.

2023 Contribution Limits:

  • Health Savings Accounts (HSAs) – $3,850 for self-only coverage, $7,750 for families
    • Additional $1,000 for those 55 and older
  • 401(k)s & Other Elective Deferral Plans – $22,500
    • Additional $7,500 for those 50 and older
  • Individual Retirement Accounts (IRAs) – $6,500
    • Additional $1,000 for those 50 and older
  • Small Business Retirement Plans – Amount varies
    • Catch-up amount varies for those 50 and older

If you know you typically max out any of these saving strategies, December is a good time to plan ahead and get your cashflow and withholdings adjusted for the new year. You may also want to consider a New Years Resolution to save more into these accounts! Generally, prioritize any employer plans with matches, followed by HSAs and IRAs.

We know this time of year is busy, so know that we are here to support you each step of the way. Give us a call to discuss any of these items – we’d love to hear from you!

 

1. “Giving USA 2020: Charitable Giving Showed Solid Growth, Climbing to $449.64 Billion in 2019, One of the Highest Years for Giving on Record: Giving USA.” https://givingusa.org/giving-usa-2020-charitable-giving-showed-solid-growth-climbing-to-449-64-billion-in-2019-one-of-the-highest-years-for-giving-on-record/.

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