5 steps to take now to cut your 2022 tax liability: Defer or accelerate income and deductions
High inflation, rising interest rates, and a downturn in the stock market have all made for an eventful year. While there isn’t much you can do to change any of these financial aspects, you can influence how much your federal tax bill will be for the year. So here is the second of five pre-year-end planning ideas that could help you lower your tax obligation for 2022 or in the future: deferring or accelerating income and deductions.
Deferring or accelerating income and deductions
Accelerating deductions into the current year while deferring income to the following year is a typical way to reduce taxes. This makes the most of tax benefits that phase out dependent on income is possible. That includes the IRA contribution deduction, child tax credits, and education tax credits. If you work by yourself, for instance, you might put off sending out invoices until the end of December (raising the likelihood that they won’t be paid until 2023) and buy equipment in December rather than January (assuming you use cash-basis accounting).
Conversely, if you anticipate moving into a higher tax band, you may delay deductions and accelerate income. For instance, you can increase your income by:
- Recognizing capital gains
- Exercising stock options
- Realizing deferred compensation
- Converting to a Roth IRA
High earners might defer income while considering the 3.8% net investment income tax (NIIT). When modified adjusted gross income (MAGI) exceeds $200,000 for single and head-of-household taxpayers, $250,000 for married couples filing jointly, and $125,000 for married couples filing separately, the NIIT becomes applicable. Delaying investment income may help you avoid a potentially significant tax hit.
Taking action now to cut your 2022 tax liability
Many people have had difficult financial years and worry that the economy will last into the following year. But one thing is sure: everyone wants to pay less in taxes. So to get help with your year-end tax planning, contact our RRBB accountants and advisors today. Keep an eye out for the next three tips!
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