The British saying “Keep calm and carry on” seems like a good motto to live by in uncertain times like these. Still, a little freak-out about what lies ahead is totally normal, even expected.
Plunging ahead through the rest of 2022, which is most likely to be rough waters economically, doesn’t mean you have to lose your head, though (even if every other Northeast Ohio taxpayer is).
There are a lot of moving parts right now. Russia’s war on Ukraine can’t last much longer (we hope), gas prices are easing (somewhat), the job hiring frenzy is slowing (kind of), and the newly passed Inflation Relief Reduction Act promises to ease health care costs (for some). Though that doesn’t mean things will get easier, it might mean you can catch your breath for a quick minute.
Another way to ease financial uncertainty is to make plans now that will help come tax filing season. There are moves you can make now to reduce your tax liability and ensure you’re doing everything to keep as much of that income you’ve worked so hard to get.
Also, in an effort continue bringing Northeast Ohio clients like you real value in these uncertain times, whether or not you schedule a time with me, I’d like to take today to talk about tax planning for the rest of 2022. Let’s jump into what you should be doing before 2022 is in the rearview.
Beth Loxley’s Tax Planning Tips for 2022
“Collecting more taxes than is absolutely necessary is legalized robbery.” – Calvin Coolidge
Now that we’re into the second half of 2022, it’s time to revisit our tax planning for the year. Because the end of the year will be here before you know it, as will tax season.
We’ve got unusual stuff to consider in tax planning this time around (a sentiment that seems to be pretty commonplace over the past few years) – namely inflation and the risk of recession, and their related potential changes in tax laws.
Let’s see what’s going on right now and how you can plan your taxes through the rest of 2022, to lighten the burden and bring you incentives.
It’s all an Act
First, let’s look at recent headlines and how lawmakers might change your tax situation. Or won’t.
Washington’s been all a-flutter lately over the Inflation Reduction Act, which so-called experts say probably won’t do much to corral inflation and, as it turns out, probably won’t change your individual taxes much, either. Tax rates, trust taxes, gift taxes: all left out of the Act. (Sometimes in tax planning it’s just as valuable to know what to ignore in the headlines…)
The bigger news, maybe, is that as our economy lurches toward a recession you need to watch for declines in your taxable income and the potential for tax-free benefits like recent years’ stimulus payments. Don’t touch that dial …
Let’s look at some of the old standards in tax planning and how they apply to 2022.
Adjust withholdings. Your employer withholds income tax from your paycheck and pays it to the IRS; if you’re self-employed, it’s likely that you estimate and pay your taxes every calendar quarter. Either way, it’s still not too late in 2022 to make sure you’re having enough withheld or paying enough quarterly to avoid a nasty big tax bill next April.
Check into this especially if you just had a big life change, like getting married or divorced, retiring, or having a child. We can help, too, and the IRS also has a withholding estimator.
Pump up your nest egg. This is a great idea any time but an especially smart move as we get closer to the end of the year and the next April tax deadline – and the deadlines to contribute to your IRA or 401(k). No matter the ups and downs of the market, maxing out your annual contributions, if you can, always makes sense. Even if you do need to cut back on contributions because of rising expenses (we all feel that pain), kick in at least enough to max out your employer’s matching contributions.
A reminder: You can put up to six grand (seven thousand if you’re 50 or older) in your IRA and north of 20 thousand dollars into a 401(k), 403(b), and most 457 retirement accounts.
While we’re on the subject, this might be a good year to convert your retirement funds to a Roth IRA. A traditional account lets you deduct your contribution from your taxes but taxes the money when you withdraw it in retirement. With a Roth, you kick in after-tax money, but the funds grow tax-free – and you can take them out tax-free when you’re retired. You pay tax now on what you convert.
But here’s the key point: The current tax rate is low and will probably be higher later when you have to withdraw the money. If you have to pay tax on the money sometime, it might be better if you pay now.
While we’re still on the subject, with the Great Resignation in full swing (though maybe easing some), maybe you were one of the tens of millions who left their job last year. If so, you might qualify to open a Simplified Employee Pension (SEP) IRA. You can contribute more than to a Roth IRA, as much as 25% of your gross annual salary – or up to more than 60 grand.
Have a little class. If you decide that this fall is the time to head back to school, there are many tax credits and deductions open up, including the American Opportunity Tax Credit (AOTC) and the Lifetime Learning Credit (LLTC). These can help you pay for qualified tuition and related expenses; generally, you’d use the AOTC for undergraduate school and the LLTC for graduate school and continuing ed. We’re happy to field any questions.
Put those investment losses to work. You may have heard a lot about tax loss harvesting, which involves lowering your taxes by selling an investment at a loss (also dumping your bad holdings) and using the loss to offset the taxes you owe on an investment that you sell at a profit (aka a capital gain). You can even “carry forward” losses into future years. It can work well.
But only in certain situations – check with us on this before you make any moves. You still have time to plan carefully.
This is just a baseline to get you started in the world of tax savings. Something I can do is take a look at your individual situation (or any Northeast Ohio friend’s situation and help you make the right moves for you.
On your team,