8 year-end tax moves you can't afford to miss
Monday, December 26, 2022
Merry Monday Holiday After Christmas on Sunday. Happy Boxing Day. Joyous End-of-Year Tax Tasks to Complete Week.
Yep, the start of the last week of 2022 has a lot of identities. But it's that last designation that you need to pay close attention to, since the end of the tax year is critical when it comes to many tax moves.
Here are eight you need to consider and, if they apply to you, complete by Dec. 31 — or actually by Friday, Dec. 30, in some cases since it's the last business day of 2022.
1. Take your required minimum distribution. This withdrawal from tax-deferred retirement plans, typically referred by its acronym RMD, is demanded by Uncle Sam once you turn 72 (or 70½ if you hit that age before a law change upped the effective birthday). The reason for RMDs is simple. The U.S. Treasury has been waiting for its cut of your traditional IRA and 401(k) earnings for years.
Once you get on the RMD track, you must take it annually by Dec. 31 — or the end of the business year (the aforementioned Friday, Dec. 30, this year) so that your account manager can ensure it meets the deadline. Don't ignore the RMD requirement or you'll face a hefty tax penalty.
2. Meet your RMD by making a QCD. You've saved enough, and also are getting Social Security monthly benefits, so that you don't need the full RMD amount the Internal Revenue Service says you must take per its updated life expectancy withdrawal tables. But if you don't take the money, you'll still face the penalty…unless you give it away.
You can donate up to $100,000 of your RMD by using a Qualified Charitable Distribution, or the QCD in this item's title. This move directly transfers your RMD amount to your IRS-approved nonprofit. The amount meets your RMD, but since it goes straight to the charity without passing through your hands or bank account, it's not taxable income.
Again, your retirement account administrator wants you do this during the work week, which ends on Friday, Dec. 30, this year. If you wait too long, your transaction likely will end up being posted in early 2023, and that won't do you any good this tax year.
3. Harvest your tax losses. It's been tough watching the stock market this year. Through Dec. 23, the NASDAQ was down 33 percent, its worst yearly performance since 2008. The Dow's pre-Christmas self-off was equally distressing. So chance are your portfolio took a hit. If you're in it for the long haul, be patient.
But it's also a good idea to reassess your holdings periodically. If you find in doing so you should sell some holdings, do so this week (again, the last trading day is Friday, Dec. 30) and use losses — known in tax parlance as harvesting losses — to offset any gains you might have. Gains do happen even in bad stock years, notably through capital gains distributions of mutual funds. And if you have more losses than gains, you can use up to $3,000 to reduce the year's taxable ordinary income.
4. Convert your traditional IRA to a Roth IRA. If you have a lot of money in a tax-deferred traditional IRA but aren't facing or even close to dealing with RMDs, now could be a good time to start shifting some of that money to a Roth version. That way, you won't have to worry about future IRS-required withdrawals. Of course, that means you'll have to pay tax on any traditional IRA amounts you convert to a Roth IRA. And the converted funds could bump you into a higher tax bracket. But at least by doing so now, you'll be paying at historically low ordinary tax rates.
Don't make the retirement plan decision lightly. Once you convert to a Roth IRA, it can't be undone. But if you do decide the switch is right for you, do so by, you got it, the end of this business week, aka Friday, Dec. 30.
5. Contribute to your child's 529 plan. The cost of college is not dropping, so it's always a good idea to put money into tax-favored education plans. Lots of parents swear by 529 plans. These college savings accounts grow tax-free as long as you eventually use the money to pay for qualifying educational expenses. In addition to the usual classroom-related fees, books, supplies and equipment, tax law changes now make 529 funds available for kindergarten through grade 12 education costs. And just-enacted retirement laws make 529s even more appealing; starting in 2024, unused funds in these education accounts can be rolled into a Roth IRA.
Even better, some states offer income tax deductions to residents of the state that contribute to that state's plan. To make sure you get to claim that deduction for this tax year, you'll need to make your 529 plan contribution by the end the tax year.
6. Donate to charity. Keep the season of giving going beyond today's Boxing Day. Give to your favorite 501(c)(3) nonprofit by Dec. 31 and, if you itemize, claim the gifts as deductions on Schedule A. (Unfortunately, the $300 for single filers/$600 for married jointly filing taxpayers donation exemption directly on Form 1040 is no longer available.)
To have your donation count on your 2022 tax return, you must make it by Dec. 31. You can do so by writing a check or charging your gift on a credit or debit card. You also can drop off qualifying household goods by year's end. For more tax code affected giving ideas, check out my Boxing Day post for 5 tax-smart alternative ways to contribute to charities.
7. Give away some of your wealth. You don't have to limit post-Christmas giving to charity. Some people make substantial financial gifts to family and friends, without any tax consequences for the recipients. Such generosity not only gets the giver added thanks, but also helps reduce the amount of their eventual estates subject to taxation when death and taxes finally converge.
The tax code allows you to give up to a specific gift amount, known as an annual exclusion, each year. For 2022, that's $16,000; it's adjusted annually for inflation, going to $17,000 next year. This year, that's 16 grand to as many people, relatives or otherwise, you want. And it's per taxpayer, so each spouse gets the same tax-saving gifting opportunity. So get out your checkbook and start writing, or at least do so by Dec. 31.
8. Double check expected estimated taxes. Brightly wrapped packages under the tree aren't the only things that show up in December. Lots of folks get extra cash at the end of the year. Some of it is from seasonal gig jobs. Some of it is from year-end investments, like the capital gains distributions mentioned in #3. The money definitely is welcome, but note that it's also taxable income, even those asset distributions that are reinvested.
Since these amounts typically aren't subject to withholding, recipients of this year-end money will need to pay estimated tax on it. You'll count this December cash influx in your final 2022 quarterly estimated tax payment.
Yes, that 1040-ES payment isn't due until Jan. 17, 2023. But now is a good time to think about where you're going to get that money. If you underpay your 1040-ES amounts, you could owe penalties and interest when you file your annual Form 1040 next year.
Yeah, I know this is now how you planned to spend the final week of the year. After celebrating a holly, jolly Christmas, or just a few days off if it's not your holiday, you wanted to kick back and relax until it's time to welcome in 2023.
But spend some time checking out these year-end tax tasks. They could save you some money, as well as prevent potential future hassles with the IRS.
You also might find these items of interest:
- Tax situations where Dec. 31 really matters
- It's capital gains tax gain harvesting season
- Last-minute tips for those facing Dec. 31 retirement plan RMDs
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