Nov 30, 2022
Last-minute ways to cut your taxes
Nobody wants to pay more income tax than they need to. If you’d like to lower your tax burden for this year, there’s still time to pull it off, but you’ll have to hurry. Here’s a list of six tax-saving actions that you might be able to take before January 1, 2023.
1. Determine if you will take the standard deduction
Some tax-cutting techniques are only available to Americans who itemize their tax return. The Internal Revenue Service estimates that 90% of Americans take the standard deduction instead of itemizing.1
2. Postpone income
If you can defer some of your income or a bonus until early 2023, you won’t have to pay taxes on that money for another year. It could be easier to do that if you are a freelance worker or self-employed.
3. Contribute to charity
If you itemize deductions on your tax return, you can usually capture a tax deduction by writing a check to a charity. While donations for 2022 must be made by December 31 of this year, if you make a donation with a credit card, it will count as a 2022 tax deduction even if you don’t pay the bill until 2023.
You can also pocket a tax deduction for in-kind services. Dropping off clothing and housewares to a local charity, for instance, constitutes an in-kind donation. If you make a non-cash donation of more than $250, you will need a receipt that includes a description of the items donated.2
4. Donate appreciated assets
You can get more benefit from your charitable donations if you give appreciated securities (i.e., those that have gained in value from the time you bought them). Instead of selling stocks or mutual funds for a profit and then having to pay taxes on the capital gains before making your donation, you can donate the actual shares to a nonprofit organization and receive a charitable tax deduction for the entire donation. You save on income tax and get a bigger tax deduction, while the nonprofit benefits from a larger donation.3
5. Prepay deductible expenses
For expenses you’d normally pay in 2023, consider paying them in December of this year instead. If you pay your January mortgage payment in December, for instance, you can claim it on your 2022 tax return.4
6. Look for ways to offset capital gains
Try to minimize the tax hit from any capital gains you captured for the year in your investment portfolio.
Short-term capital gains, which are generated by the sale of investments held for less than one year, will result in the biggest tax bill. That’s because these profits are taxed at your ordinary income tax rate rather than at the capital gains rate.5
In contrast, long-term capital gains are taxed at a lower rate (anywhere from 0% up to 20%), depending on your income tax bracket.6
You may also sell an investment at a loss to help offset the profit taken on another investment. There is no limit on the number of capital losses that may be used to offset capital gains. In addition, if your capital losses exceed your capital gains in a given year, you may use up to $3,000 of capital losses to offset ordinary income (thus reducing your ordinary income tax liability) and carry forward the remaining capital losses indefinitely to be used against capital gains in future tax years.7
What you shouldn’t do, in our view, however, is make investment decisions simply to avoid taxes without considering your overall long-term investment goals. We think that saving on income tax is a worthy pursuit, but not if it’s at the expense of the potential future growth of your wealth.
1 https://www.forbes.com/advisor/taxes/standard-deduction-vs-itemized-deductions/
2 https://www.irs.gov/taxtopics/tc506
3 https://www.forbes.com/advisor/investing/donate-stock/
4 https://thefinancebuff.com/make-mortgage-payment-due-january-1-december.html
5 https://www.investopedia.com/articles/personal-finance/101515/comparing-longterm-vs-shortterm-capital-gain-tax-rates.asp#:~:text=Ordinary%20income%20is,marginal%20tax%20bracket.
6 https://turbotax.intuit.com/tax-tips/investments-and-taxes/guide-to-short-term-vs-long-term-capital-gains-taxes-brokerage-accounts-etc/L7KCu9etn
7 https://turbotax.intuit.com/tax-tips/investments-and-taxes/capital-gains-and-losses/L7GF1ouP8
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Dowling & Yahnke is a fee‐only registered investment adviser. Since 1991, Dowling & Yahnke has provided time-tested, objective financial planning advice and investment management services designed for the financial health and personal freedom of its clients. Located in San Diego, California, the Firm manages approximately $5.7 billion for more than 1,300 clients, primarily individuals, families, and nonprofit organizations.
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