With the US tax laws being so complicated, there’s a good chance that just about everyone is missing out on a tax saving opportunity without even knowing it.
I generally put these opportunities into one of three categories – deferring taxes, accelerating taxes, and avoiding taxes. Now to be clear, when I say “avoiding”, I’m not talking about cheating on your taxes… I’m referring to tax planning opportunities that either reduce or eliminate taxes in a completely legal way.
Each of the tax planning tips listed below could easily fill an article on their own, so I strongly encourage you to consult with a CPA or a Certified Financial Planner™ to find out which will work for you without creating any unintended tax consequences.
Deferring taxes is all about reducing your current year tax bill in hopes that future tax paid will be lower than the amount of current tax saved. Here are a few 2022 tax deferral tips to consider:
Tax deferral (if you are currently in a high tax bracket)
– Increase your pre-tax contributions to an IRA or the retirement plan sponsored by your employer
– If you’re self-employed, consider opening your own retirement savings plans (like a SEP or Solo 401k) to make pre-tax contributions
Sometimes it makes sense to pay some extra taxes this year if it means avoiding a higher amount of future taxes (for you or your kids). Here are a few 2022 tax acceleration tips to consider:
Tax acceleration (if you are currently in a low tax bracket)
– Convert a portion of your pre-tax IRA to a Roth IRA
– Increase after-tax contributions to a Roth IRA or the retirement plan sponsored by your employer or, if you’re self-employed, consider opening a Roth Solo 401k
– If your adjusted gross income (AGI) is too high to qualify for contributing to a Roth IRA, consider making a “backdoor” Roth IRA contribution (or a “mega backdoor” Roth contribution to your employer’s retirement plan)
– Contribute after-tax dollars to a 529 savings plan to grow tax free for future college expenses
The holy grail of tax planning is when you can effectively eliminate taxes (not just defer them) with a tax strategy that achieves the same end results by just doing things a little differently. Here are a few 2022 tax reduction or elimination tips to consider:
Tax reduction or elimination (no matter what tax bracket you are in)
– Contribute to a Health Savings Account (HSA) plan if you qualify
– Wait to sell an appreciated investment until you’ve owned it for at least 1 year since tax rates on “long-term” capital gains are much lower than “short-term” gains
– For your charitable giving, instead of making cash donations consider donating appreciated investments or, if you are over age 70½, make Qualified Charitable Distributions (QCDs) from an IRA
– “Bunch” your tax-deductible charitable donations into every other calendar year if it allows you to alternate between itemizing your deductions one year and then taking the standard deduction the next year
– Rather than name a charity as a beneficiary in your will, name them as a beneficiary of your pre-tax IRA since your kids will pay tax on inherited IRAs but charities won’t
– If you live in Washington and your estate value has grown above $2.2M, make lifetime gifts to your children and grandchildren to reduce (or avoid) future estate taxes
If you’d like more information on some of these topics, here are links to a few of my previous articles:
Self-Employed “Solo” 401k Plans
Tax Efficient Donation Strategies
K. Paul Hansen, CFP®, CPA
Financial Advisor
Paul Hansen is a financial advisor and tax planning specialist at HFG Trust, helping his clients plan towards long-term, strategic financial growth. Prior to joining our firm, Paul spent 25 years working in the tax and accounting fields, previously serving as the Controller at one of the largest publicly traded engineering/construction companies. He is a graduate of the University of Washington, earning his Bachelors of Arts degree in Business Administration (Accounting), and in 1990 obtained his Certified Public Accountant designation.
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