Education | Feb 28, 2023
There is Still Time for Year-beginning Tax Planning
Nancy I. Kunz
CFP®, CPFA®, ChFC®, CLU®
CFP®, CPFA®, ChFC®, CLU®
Smart investors regularly execute a year-end tax strategy to tie up any loose ends and take advantage of any last-minute tax savings before the new year arrives. But many overlook important tax-saving strategies that can be implemented at the beginning of the year. With Tax Day approximately six weeks away, there are still ways to save on 2022 taxes while getting a good jump on a tax-saving strategies for 2023.
As we begin a new tax season, you may want to first assess if you have experienced any negative impact from 2022 and see if you’re still on track to hit your financial goals. This will help you determine the timing, urgency, and extent of your tax saving efforts. The earlier you consider your tax situation, the better the outcome.
Once you have taken stock of progress towards your financial goals, your year-beginning tax strategy may include the following actions:
Gather all important documentation: income and holdings
If you haven’t done so already, now is a great time to get organized. Every household needs a basic document outlining all financial accounts, along with the name of the provider, account numbers, and the names of the professionals you work with. (Your DBR & CO advisory team can provide you with a copy of our LifePlan Checklist if needed.) The beginning of the year is the perfect time for your financial advisors to help identify and correct oversights.
Contribute to an IRA for 2022
You still have an opportunity to increase retirement account contributions to reduce taxable income for 2022 if your taxes have not already been submitted. Getting an early start now will also begin the clock on your tax-deferred earnings for 2023. Since Traditional IRA, 401(k), and 403(b) contributions are typically made with pre-tax dollars, adding to these accounts can result in tax savings by reducing taxable income.
This may also be a good time to make sure you’re maxing out your contributions to accounts such as a 401(k), 403(b) and traditional IRA. Contributions made now can lower your current taxable income and defer taxation until after retirement when your income bracket and tax rates may be lower. Plus, if your employer offers matching contributions, you’re essentially receiving free money which also isn’t taxed until retirement.
Understanding the contribution limits for tax-advantaged accounts is essential to maxing them out. The contribution limit for 401(k)s and 403(b)s in 2022 is $20,500, and $27,000 for those aged 50+ ($22,500 and $30,000 in 2023). The limit for IRAs is $6,000 and $7,000 for those 50+ (up to $6,500 and $7,500 in 2023).
You may also want to talk to your advisor about making contributions to certain accounts, then rolling them over to a Roth IRA shortly afterward. You may also contribute directly to your Roth IRA if your income is below a certain level. While you won’t get a current-year deduction, you will have the benefit of funding a retirement account that grows tax-free.
Fund your health savings account (HSA) for 2022
Contributing to a Health Savings Account can benefit you in 2022 and 2023. For 2022, you can still make contributions up until April 18, 2023 - again, provided you haven’t already submitted your taxes. There are three important tax advantages that they can provide: Payroll HSA deductions are pre-tax, growth is tax-free, and withdrawals for qualified medical expenses aren’t taxed. If you make HSA contributions directly, you may be able to claim a tax deduction for that amount when you file your tax return. Importantly, you don't have to itemize to claim the HSA deduction.
If you are looking to enjoy last-minute savings from your HSA, it is important to know the contribution limits for 2022. An individual with coverage under a qualifying high-deductible health plan (deductible not less than $1,400) can contribute up to $3,650 — up $50 from 2021 — for the year to their HSA. The maximum out-of-pocket has been capped at $7,050.
An individual with family coverage under a qualifying high-deductible health plan (deductible not less than $2,800) can contribute up to $7,300 — up $100 from 2021 — for the year. The maximum out-of-pocket has been capped at $14,100. Individuals who have an HSA and are over age 55 can also contribute an extra ‘catch-up’ contribution of $1,000 annually.
In addition to the tax savings realized for 2022, contributing to your prior-year HSA will have additional benefits for health care expenses as they arise—whether that’s today, next year or in retirement. By contributing now, your extra contribution can also help add a safety cushion to your account balance.
Review tax benefits of your estate plan
Too often, gifts and contributions are made at year-end, allowing those funds to earn taxable income throughout the year. There may be advantages to moving those funds out at year-beginning to let them grow outside your estate. This includes giving cash or assets with a high tax basis so your beneficiaries aren’t burdened with additional taxes. You can also pay directly for another’s educational and medical expenses without those payments counting against the annual exclusion gift amount or lifetime exemption.
Setting clear goals and maintaining momentum of your overall plan are important elements in making financial progress. Things will change throughout the year, but taking action at the beginning of the year will help you stay focused on meeting your goals.
Thanks for reading.
This material has been provided for general, informational purposes only, represents only a summary of the topics discussed, and is not suitable for everyone. The information contained herein should not be construed as personalized investment advice or recommendations. Rather, they simply reflect the opinions and views of the author. D. B. Root & Company, LLC. does not provide legal, tax, or accounting advice. Before making decisions with legal, tax, or accounting ramifications, you should consult appropriate professionals for advice that is specific to your situation. There can be no assurance that any particular strategy or investment will prove profitable. This document contains information derived from third party sources. Although we believe these third-party sources to be reliable, we make no representations as to the accuracy or completeness of any information derived from such sources, and take no responsibility therefore. This document contains certain forward-looking statements signaled by words such as "anticipate," "expect", or "believe" that indicate future possibilities. Due to known and unknown risks, other uncertainties and factors, actual results may differ materially from the expectations portrayed in such forward-looking statements. As such, there is no guarantee that the expectations, beliefs, views and opinions expressed in this document will come to pass. Information presented herein is subject to change without notice and should not be considered as a solicitation to buy or sell any security. All investment strategies have the potential for profit or loss. Asset allocation and diversification do not ensure or guarantee better performance and cannot eliminate the risk of investment losses. The impact of the outbreak of COVID-19 on the economy is highly uncertain. Valuations and economic data may change more rapidly and significantly than under standard market conditions. COVID-19 has and will continue based on economic forecasts to have a material impact on the US and global economy for an unknown period.
Chief Planning Officer
Nancy I. Kunz
CFP®, CPFA®, ChFC®, CLU®