The end of the year gets busy from holiday shopping to New Year parties – there’s a lot on your mind. And while tax season isn’t until April, there are some moves you can make now to lower your 2022 tax bill. These moves could give you more to spend on those gifts, celebrate more at your New Year parties, or just be happy that you’re making smart money moves. Here are three ways to potentially lower your taxes before the year-end.
1. Invest in your pretax retirement account
Placing a large amount of your last paycheck or bonus into a pretax retirement account can help lower your taxable income. Here are the limits for this year and next:
401(k): $20,500, plus an additional $6,500 if you’re 50 or older
IRA: $6,000, plus $1,000 if you’re 50 or older
401(k): $22,500, plus an additional $7,500 if you’re 50 or older
IRA: $6,500, plus $1,000 if you’re 50 or older
2. Consider gifting
A charitable giving strategy can help you align your values with your giving in addition to maximizing potential tax deductions. It can build legacy, honor a loved one, and support causes true to you and your family. When creating a giving strategy make sure to note your philanthropic goals and financial considerations. Giving strategies can include gifts of cash or appreciated assets, charitable trusts, private foundations, or donor-advised funds.
3. Tax-loss harvesting
Tax-loss harvesting is a strategy investors can use to reduce the total amount of capital gains taxes due from the sale of profitable investments. M1 has tax minimization built into our algorithm, though it does not automatically do tax-loss harvesting. Tax minimization means that, when selling securities, M1 will do so in order of the lowest tax burden to the highest. Tax-loss harvesting is an investment decision that you can make and implement your strategy on M1’s platform or in consultation with a tax advisor.
Many are looking ahead to 2023 already but it’s important to finish your financial plan this year before moving onto next. Review last minute items to make the most out of your dollars and consider the wins and losses of 2022 for your strategy in 2023.