These 4 Mid-Year Tax Strategies Can Cut Next Year’s Bills From the IRS
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1. Consider tax deductions
When starting a new job, you fill in Model W-4Include the amount your employer withholds from your paycheck for federal taxes.
But you need to reconsider those withholdings, especially for big life changes like getting married, having kids, or starting a side business.
Top reasons to adjust your withholding:
1. Tax law changes
2. Lifestyle changes such as marriage, divorce or children
3. New job, side gigs or unemployment
4. Variable tax deductions and credits
You can use IRS Tax Withholding Estimator to see if you’re on the right track or run forecasts with the advisor for more complex scenarios.
And if you’re expecting a shortfall, there’s plenty of time to adjust your tax withholding or make estimated payments for the third or fourth quarter, Guarino said.
2. Increase 401(k) contributions
If your budget is generous, you might consider boosting your savings in pre-tax retirement, which will reduce your adjusted gross income.
“If you can, now is a great time to increase 401(k) contributions“Christopher Lyman, CFP based in Newtown, Pennsylvania with Allied Financial Advisors.
You can store $20,500 into your 401(k) for 2022, with an extra $6,500 if you’re 50 or older. Regardless of your savings goal, you can make it easier to reach it by increasing your loan deferral period now.
3. Consider Converting a Roth IRA
With the stock market falling since the beginning of the year, there is an opportunity to save for the so-called Roth . Individual Retirement Account Conversion.
Here’s how it works: After making a non-deductible contribution to a pre-tax IRA, you can convert the amount to a Roth IRA. While this move promotes tax-free growth, the trade-off is upfront contributions and earnings.
Still, a bear market could be a great time to pay taxes on properties you want to convert, Lyman said.
For example, let’s say you invested $100,000 in a pre-tax IRA and it’s now worth $75,000. You can save taxes because you will be converting $75,000 instead of the original $100,000.
Of course, you’ll need a plan to cover those taxes, and an increase in income can lead to other tax consequences, such as higher futures. Medicare Part Refund Premium.
4. Consider tax revenue loss
Another opportunity when the stock market is falling is harvest loss tax revenueor use losses to offset profits, said Devin Pope, a CFP and partner at Albion Financial Group in Salt Lake City.
“We’re doing that for our customers right now,” he said.
You can sell falling assets from your brokerage account and use those losses to reduce other gains. And once the loss exceeds the profit, you can deduct up to $3,000 per year from your regular income.
However, you need to follow the “wash sale rule”, which will prevent you buy a “essentially identical” property 30 days before or after the sale.