If you're saving for retirement, itemize deductions, or hold outside investments (other than in retirement accounts), the financial decisions you make between now and the end of the 2022 calendar year can have a significant effect on how much tax you’ll have to pay next April.
- If you are still working and got hit with a big tax bill for the 2021 tax year because you didn't have enough money withheld from your paycheck, you still have time to take steps before December 31 to avoid another unwelcome surprise. Check the IRS's Tax Withholding Estimator now to determine whether you should increase the amount of taxes withheld from your paycheck before the end of the year (you'll need your most recent pay stub and a copy of your 2021 tax return to help estimate your 2022 income). If it looks like you're going to owe money when you file your next tax return, the IRS tool will tell you how much "extra withholding" you should put down on Line 4(c) of Form W-4 (your employer can provide this for you) to catch you up on withholding for 2022.
Tip: In January, be sure to complete another W-4 for withholding in 2023 so that you can avoid any shortfall next year.
- Make the most of your employer's retirement savings plan. If your budget allows, consider increasing the amount you add to your traditional retirement account from the last few paychecks of the year. You can contribute up to $20,500 to a 401(k), 403(b) in 2022, plus $6,500 in catch-up contributions if you're 50 or older. These pretax contributions will lower your take-home pay and, as a result, reduce your tax bill. Contact your 401(k) administrator or your employer's human resources department to find out how much you're on track to contribute to your retirement account by the end of the 2022.
- To itemize…or not to itemize? Unless there have been significant changes to your financial situation during 2022, you probably already know whether you'll itemize or claim the standard deduction ($12,950 if you are single; $25,900 if you are married filing jointly). If you plan to itemize or if you're close to the threshold, consider prepaying some of your tax-deductible expenses, such as mortgage payments that will be due in January. Other ideas:
Review your medical bills.If you have unreimbursed medical expenses that exceed 7.5% of your adjusted gross income, you can deduct them. While this requirement puts this tax break out of reach for most taxpayers, if you had extraordinarily high medical expenses in 2022 (due to major surgery or treatment for a chronic condition, such as "long COVID," for example) you may qualify.
Tip: If you plan to schedule appointments or medical procedures in early 2023, consider scheduling them between now and December 31. Eligible expenses include dental and vision care, which may not be covered by your insurance; check IRS Publication 502 for details.
- Pay your property taxes early. Taxpayers can still deduct up to $10,000 in state and local taxes each year. If your municipality allows it, consider paying the property tax bill due in January 2023 in December 2022; this will allow you to deduct it on your 2022 tax return.
- Consider creating a Donor Advised Fund (DAF) before December 31. A DAF is a charitable investment account created for the sole purpose of supporting charitable organizations you care about, like Drexel University or Drexel University College of Medicine. Transferring assets, including cash, stocks and even personal property, to a DAF allows you to deduct the entire value of the contribution in the year you make the gift. You can decide later how you want grants to be paid out to the charity of your choice. Contributing one, larger gift to a DAF this year may help raise your deductions above the standard deduction amount and allow you to itemize for 2022.
- Turn those loser stocks into tax savings. The current tax code allows you to sell investments that have fallen below your original purchase price and use the resulting loss to offset capital gains in your taxable accounts. Investments that you've held for a year or less are taxed as ordinary income, but investments you've held longer will be taxed at the long-term capital gains rate (ranging from 0% to 23.8% for 2022, including the 3.8% surtax on net investment income).
After matching short-term losses against short-term gains, and long-term losses against long-term gains, any excess losses can be used to offset the opposite kind of gain.
For 2022, lower-income investors (with income less than $41,675 for single filers and $83,350 for joint filers) pay no capital gains tax on investments held for more than a year. If you’re in the group, it may make sense to sell winning investments tax-free before December 31 and reinvest, which will have the effect of resetting the odometer on future gains.
- Donate your IRA’s RMD to a qualified charity. Taxpayers who are 70.5 or older can directly transfer up to $100,000, tax-free, from their traditional IRAs to a qualified charity, like Drexel University or Drexel University College of Medicine, each year. This is especially beneficial for IRA owners who are 72 or older, because the qualified charitable distribution (QCD) counts as your required minimum distribution (RMD) without adding that amount to your taxable income for the year (and possibly keeping your income below the threshold at which you're subject to the Medicare high-income surcharge).
Tip: If you decide to make a QCD, do it well in advance of last day of the year. To qualify for the tax break, the money must be out of the account and the check needs to be cashed by the charity by December 31st.
- Consider a Roth IRA conversion now. Roth IRAs are highly popular because they offer tax-free growth, tax-free withdrawals for you and your heirs, and no required minimum distributions. The stock market’s volatility and poor performance in 2022 make this an excellent time to consider converting some money from your traditional IRA to create a Roth IRA. Why? When you convert to a Roth IRA, the funds are treated as income and you’ll be taxed on the dollar amount that’s converted, making this year’s decline in the value of your portfolio advantageous. The lower the value of your portfolio, the cheaper it will be to convert your funds. And when those assets recover, all that growth will lead to tax-free distributions.
Tip: Be careful about making a large conversion if you're within two years of signing up for Medicare — you'll have to pay extra for Medicare Part B if your adjusted gross income (plus tax-exempt interest income) is more than a certain amount.
- Prepay college tuition for the coming semester. Whether you itemize or not, if you have a child enrolled in college, consider paying the first quarter tuition bill for 2023 in December 2022. The American Opportunity Tax Credit, which you can take for students who are in their first four years of undergraduate study, allows up to $2,500 for each qualifying student. Married couples filing jointly (with modified adjusted joint income of up to $160,000) can claim the full credit, while those with income of up to $180,000 can claim a partial amount.
If you are planning to enroll in classes yourself to enhance your professional career in 2023, consider doing it now and prepaying the bill before December 31. This will qualify you to claim the Lifetime Learning Credit on your 2022 tax return, which is worth up to 20% of your out-of-pocket costs for tuition, fees and books (up to a maximum of $2,000). It's not limited to undergraduate expenses, and you don't have to be a full-time student. As with the American Opportunity Tax Credit, married couples filing jointly with modified adjusted joint income of up to $160,000 can claim the full credit, while those with income of up to $180,000 can claim a partial credit.
It's important that you consult your tax professional now about steps you may still be able to take to lower your 2022 tax bill. We’re happy to help with questions, too. Contact David Toll, JD, senior associate vice president, Drexel University Office of Gift Planning at giftplanning@drexel.edu or 215.895.1882.