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Ho! Ho! Ho! 8 tax moves to make this December


It's December! Are you ready for all the decorating and shopping and cooking and parties and tax moves to make?

Yep, tax actions need to be added to your already very long holiday to-do list. You only have 31 days to take advantage of some Internal Revenue Code provisions that could save you money. That's always a welcome gift from Uncle Sam, but especially at this time of year.

Plus, if you take relevant tax steps sooner in the month, you'll also free up time for more traditional festivities.

So let's get to it. Here are eight easy December Tax Moves to get you started.

1. Spend down your FSA. If you have a tax-favored medical flexible spending account (FSA), now's the time to check that balance. Have you submitted all your qualifying medical expenses for reimbursement? If not, do so. Now.

This workplace healthcare benefit is popular because you fund it with pre-tax dollars each pay period, then use the money to pay a variety of out-of-pocket medical costs. But there's one drawback. If you don't use all your FSA money, you lose it. More specifically, your boss gets to keep your cash.

For most workers, that use-or-lose spending deadline is Dec. 31. Note, however, that some companies do give FSA owners a grace period until March 15. Others allow a rollover of at least some of the accounts' funds.

If you workplace's FSA policy is that you must spend it all by the end of this month, then get to it. Here are some ideas in my post 7 ways to spend your end-of-year FSA funds.

2. Be charitable. It's not called the season of giving just because of the annual exchange of brightly wrapped holiday presents. It's also the time of year when charitable organizations get most of their contributions. If you can spare it, consider giving to Internal Revenue Service-approved charities that can help out those who are not having such a holly, jolly time this year. My recent Giving Tuesday post has more on tax deduction donation rules.

3. Sell losing stocks. Although the stock market has bounced up a bit recently, overall investors this year are facing a bear market. The tech-heavy Nasdaq has taken the biggest hit, dropping around 30 percent so far in 2022. The Dow Jones Industrial Average lost more than 20 percent. But there is a silver lining for tax savvy asset owners. You can sell stocks that have dropped and use that loss amount to offset any capital gains you may have. That does happen, even in down times, especially for mutual fund owners who get year-end distributions. If your stock loss harvesting produces more losses than gains, you can use the excess to reduce your ordinary income, up to $3,000 per tax year.

4. Take your required minimum distribution. You diligently saved and your tax-deferred retirement account — such as a traditional IRA or traditional 401(k) workplace plan — has accrued a nice balance. But you can postpone the tax on that nest egg for just so long. The tax code has a required minimum distribution (RMD) rule.

RMDs kick in if you're 72 or older, or celebrated your 70½ birthday in 2019 or earlier before the older RMD age became law. It's how Uncle Sam finally gets his cut of your retirement savings that have been growing for years (decades in many cases) untouched by his tax collector. An annual RMD is a certain amount that affected retirement account owners must withdraw each year. It's based on your tax-deferred account values, your age, and is calculated using life expectancy figures.

Don't ignore the RMD mandate. If you don't withdraw the correct amount, determined by special IRS tables based on life expectancy, you'll face a harsh IRS penalty. You'll have to pay a fine that's 50 percent of the RMD amount you failed to withdraw.

There's one bit of relief for those who just turned 72 this year. You can postpone your first RMD until April 1, 2023. But note that will mean you'll have to take two distributions next year, the delayed 2022 amount and the 2023 RMD. Doubling up your RMDs could push you into a higher tax bracket, so run the numbers before you decide to delay.

5. Donate your RMD. If you don't need your RMD money to meet your regular living expenses, congratulations on your top-notch fiscal planning. But the IRS doesn't care. You still have to withdraw the minimal amount or pay the penalty.

Or you can give your RMD to charity. This option, known as a Qualified Charitable Distribution (QCD), is available to taxpayers who are 70½ or older. These retirement account owners can transfer up to $100,000 from their traditional IRA to an IRS-qualified charity.

This is a December Tax Move to make sooner rather than later. The QCD amount must be out of your retirement account and accepted by the nonprofit by Dec. 31. Don't push the deadline, since missing it could cost you the aforementioned large tax penalty.

Also, make sure the gift is via direct transfer. That keeps the money out of your hands, so it's not taxable income to you. But the charitable transfer does meet the RMD rule, so you don't have to worry about that penalty.

And it's not just a one-time transfer. You can make a QCD every year that your tax and personal financial situation allows.

6. Pay educational costs early. Are you helping your college age kiddos through school? You can give them and yourself a gift by prepaying 2023's first quarter tuition bill now. Then use that prepaid amount to claim the American Opportunity Tax Credit. This credit, which is a dollar-for-dollar reduction of any tax due, is for students in their first four years of undergraduate study. It's worth up to $2,500 for each qualifying student. There are income limits on the credit claim, but even if you make what the tax code considers too much, you might be eligible for a partial tax credit.

Don't forget about your own continuing education. If you're planning to take a class next year to help you do your job better, prepay that amount, too. Then use that amount to claim the Lifetime Learning Credit on your 2022 tax return. As the name indicates, it's not limited to undergraduate expenses, and you don't have to be a full-time student. The Lifetime Learning Credit is worth up to 20 percent of your out-of-pocket costs for tuition, fees, and books, up to a maximum of $2,000. Again, there are income limits, but also partial credit claim options.

7. Defer your income. If you're income level is nudging the top of your tax bracket, consider deferring income where you can. For example, if you're getting a year-end bonus, look into getting the added cash next year, which will push tax due on it into 2023. Note, however, that this is allowable only if such bonus deferral is standard practice in your company.

It's easier to defer income if you're a freelancer or other type independent contractor. Don't send your monthly billing invoice until late in December, pushing payments from your clients into the next year.

8. Maximize your retirement plan contributions. If you have a workplace 401(k) plan and you've haven't put in the maximum allowed — no shaming; it's a large amount ($20,500) and few of us can afford that number — contribute at least a little more. The per-paycheck contributions might not be that much for the few remaining December paydays, but the sooner the money's there, the more compounding will help boost your nest egg.

The same goes for those who are their own boss. Those earnings, even as a side hustle to your regular salaried job, can be used to establish a self-employment retirement account. Yes, some of these options, such as the basic SEP-IRA, can be taken care of up to next year's Tax Day (which is on April 18, 2023). If, however, you prefer a Keogh plan, which will let you contribute more, it must be established by Dec. 31., even though you still can defer this tax year's contributions until next April.

Any contributions to self-employed retirement accounts also can help lower the tax bill for the year they are made. They can be claimed as an above-the-line deduction on your tax return. So if you want a 2022 write-off here, act soon.

More year-end tax moves: I know. This is an overflowing Santa bag of December Tax Moves. But most of them, as noted at the post's beginning, aren't that hard to accomplish.

For my readers who are more organized and ready for additional tax tasks, you can find a few more in last month's Tax Turkeys to Avoid Thanksgiving feature. Those five tips, all of which are listed at the end of each turkey post (here's the link to turkey #1), still apply in December.

They should keep you occupied until I finish up the regular sidebar feature of additional December tax tasks. Yeah, I'm a bit slow myself getting into this last month of 2022! But this month's calendar listing will be there soon (I promise), just below the countdown clock clicking off the days, hours, minutes, and seconds left this year.

Update, Dec. 1, 2022 (8:50 p.m. CT): The December Tax Moves are up in the ol' blog's sidebar to the right!

That clock reading is key, since in most cases we must complete our tax tasks for the year by Dec. 31 in order for them to provide any benefit on the returns we file next year.








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