Check out Jeremy’s latest podcast on retirement planning by listening on “Apple Podcasts” or “Google Podcasts” or read below for 3 Ways To Lower Your Tax Bill.

[116] – Who doesn’t want to lower their taxes? As the end of 2022 nears, make sure your tax bill isn’t any larger than it needs to be.

In this episode, Jeremy Keil goes over the top 3 ways everyone can cut down on their taxes. After discussing tax harvesting, Roth conversions, and donor-advised funds in December, he presents some expected updates in 2023.

Jeremy discusses:

There is usually a rise in tax loss harvesting when the stock market is down, and this year, in 2022, both the stock and bond markets are down.

Tax loss harvesting allows you to take that not-so-good situation and use it in your favor when it comes to filing our tax returns.

Investors know about the ability to claim a tax loss on their taxes so they were selling their losing positions and then buying them back right away. This really didn’t meet the spirit of the tax loss deduction rules, so the government enforces what’s called a 30-day wash sale, where investors have to wait 30 days before they can repurchase the same investment.

When you sell an investment with a loss we don’t think you should sit in cash for 30 days just waiting to buy back the same position – we encourage you to buy similar, but not exact investments so that your portfolio still has a similar risk profile and you could still benefit if the market turns upward in those 30 days.

It’s important to note that when it comes to selling and purchasing different index funds, to avoid the 30-day wash rule, make sure that the new index you purchase only contains some of the same shares in it as the one you sold because if they are too similar to one another then the 30-day wash rule applies.

If you sell one company’s S&P 500 index and buy another company’s S&P 500 index fund that’s really the same investment, even if it has a different ticker symbol!

Whether the market is up or down, Roth conversions should be reviewed every year. If you don’t do it by December 31st, you’ll lose the ability to actually do a Roth conversion, which is crucial since the tax rates are set to change in 2026.

We have 4 tax years left (2022-2025) before these tax rates are scheduled to increase, so every year until then is an opportunity to do a Roth conversion. This doesn’t mean you have to do a Roth conversion, but you, your financial advisor, or your tax advisor should look at what your projected tax return might look like, and determine whether you have any room to do a Roth conversion at a good rate.

Good Roth conversion rates are often the 12% bracket, 22% bracket, and 24% bracket. There are many things that come in there such as college savings, child tax credits, and small business income deductions, and that’s why we use tax software that can plan it out and help us determine whether or not a Roth conversion would benefit you for that tax year.

Many people hear about conversions and think that doesn’t apply to them. They are really thinking of ‘contribution’ rules. The words are similar but the rules are much different! 

With conversions you can convert as much as you want each year.

With contributions there was an age limit in the past of 70 ½ for making IRA contributions, but the limit no longer exists. 

Another limitation to making contributions is that you and/or your spouse must have an actively earned income to be able to contribute to a Roth IRA.

With a conversion, even without an active income, you can still perform a Roth conversion as long as you have existing money in a traditional account.

The penalties for taking money out of your Traditional IRA if you’re below 59 ½ years of age don’t apply on Roth conversions as the money is transferred straight to the Roth account.

If you’re below 59 ½ be careful not to use your Traditional IRA money for your tax withholding – this would count as a distribution that carries that 10% penalty.

Donating to charity is great to do, and if you can get an itemized deduction, then donating can also save you money when it comes time to file your taxes.

Sometimes you’ll find that you could save more on your tax bill from charitable deductions in one year than the next, and in these cases, bunching your donations together to claim them on one tax bill is a better option.

But not everyone is okay with donating double the amount one year and then nothing the next year.

This is where donor-advised funds come in. With a donor-advised fund, you can contribute as much money as you would like to donate across numerous years and claim it on one tax bill without having to give it to the charity all at once.

The donor-advised fund separates when you give the money to charity and when you get the tax deduction for the donations.

For more information about donor-advised funds, be sure to check out our additional resources about them.

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To learn more about tax planning, check out the resources below!

If you have any questions, feel free to contact us using the contact information provided below!

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