Tax planning can seem overwhelming, but it is a necessary event at the end of the fiscal year. However, it can be exhausting, especially when all you want to do is take off on a long-awaited vacation.
Saving money is a real accomplishment in this economy. How do you start an efficient tax planning strategy and maximize your savings?
Tax Planning Strategies for 2022
1. Save for Retirement
One of the most straightforward and effective tax planning strategies is saving for retirement. Not only does this offer tax benefits right now, but it also promises an income in the future.
As a taxpayer, maximizing 401(k) contributions in your highest earning period can lead to lower current tax and income. But if your income is only expected to go up, Roth IRAs and Roth 401(k) are efficient tools that help save for future retirement with tax-free earnings and growth.
Instead of providing the current-year tax benefits, Roth vehicles draw your attention towards future tax savings. If you are a young employee, in the early stage of your career, or nearing retirement and working lower hours, Roth 401(k) is perfect for you.
2. Defer Income
The easiest tax planning strategy is to pay attention to your income.
If you feel you will receive a higher income in a financial year that will be liable to tax, you can explore ways to defer the tax payment to the following year.
3. 529 Plans
The Kiddie Tax causes you to pay more tax than you had anticipated when you decide to move assets to your young children. It does not help that tax for dependent children is calculated at the same rate as for parents.
With the benefits of 529 Plans, you can gift assets to children without paying federal tax. However, this is only true if those funds are used for education expenses. The good news is that this can also allow you to take advantage of some state tax benefits.
Many regions in the mid-Atlantic, such as DC, Maryland, Virginia and New Jersey, allow tax deductions and benefits for contributions to 529 plans. It is important to note that states sponsor 529 plans; therefore, every state has a different requirement. For this reason, we recommend consulting with an advisor from your resident state before you make investment plans.
4. Review Debts
Are you attempting to manage some outstanding debts and feel the payments will likely not be collected in time? Consider creating a strategy to pay off debts in the order of the highest interest rate first, then applying the extra funds to pay off the next highest debt until your debts are paid in full.
In some cases, contacting the creditor and working with them to negotiate a manageable pay off or pay plan can not only save money, but also maintain the integrity of your credit score.
5. Superannuation Contributions
If applicable, one personal tax planning strategy is to carry forward concessional contributions that were not used from an earlier financial year. However, to do this, your superannuation balance needs to be below $500,000.
You can carry forward any unused cap amounts depending on what you contributed in the earlier years, starting from 2018. You are allowed to use caps from up to five past financial years.
6. Increase Tax-Efficient Charitable Giving
One of the most vital tax planning strategies for the upcoming year is paying attention to charitable giving. After all, not every donation is equal. Qualified Charitable Deduction reduces ordinary income by up to $100,000 every year. Lowering ordinary income is better than charitable giving when it comes to tax reduction, as it becomes known as an itemized deduction.
If, as a taxpayer, you do not have to draw from an IRA, you can gift appreciated stock that you have been holding on to for more than a year. Doing this will have a greater impact than cash. This is because when you transfer appreciated stock to a charitable organization, the unrealized gain goes unnoticed. The donation causes an itemized deduction on the stock’s FMV (fair market value) and lower income on the non-recognized capital gain.
7. Claim Tax Deductions for Asset Purchases
If you are planning taxes for your business that has an aggregated turnover of less than five million for 2022, you can claim an instant deduction for a business portion.
This would be applicable on the cost of the asset if it was first used or installed with the intention of use for a taxable purpose. This measure is known as temporary full expensing.
Develop Your Tax Planning Strategies Today
Even if tax laws change; there are many tried-and-tested tax planning strategies for 2022 that you can utilize in any environment. Contact us to meet with tax preparers at Diener and Associates; we can prepare you for the upcoming tax season.