Dec 19, 2022
9 Year-end tips to save on taxes
While 2022 will soon be over, there is still time to capture some last-minute tax deductions. Here are nine tips that could help you shrink your tax bill before the New Year starts:
1. Prepay your taxes
Even if your property tax bill isn’t due until next year, making the payment in December will allow you to claim the tax deduction for 2022.1 If you pay estimated state income taxes on a quarterly basis, you can also prepay your state taxes. As discussed below, you may not receive the full benefit of prepaying your state income tax and property taxes if you are subject to the Alternative Minimum Tax.
2. Pay your January mortgage payment in December
Submit your January mortgage payment before the end of December, which will increase your 2022 mortgage interest deduction.2
3. Avoid the AMT if possible
Be careful about prepaying your property and state taxes early if you could be subject to the dreaded Alternative Minimum Tax. Dual-income couples who live in high-tax states and have children are more susceptible to getting snagged by this tax.3 Consult your tax professional about this potential tax trap.
4. Defer income
This will likely be easier to do if you are self-employed. Consider delaying your billing until late December or early January. If you expect to receive a bonus at year-end, see if you can postpone it until January. In our opinion, deferring income only makes sense if you expect to be in the same or a lower tax bracket in 2023.
5. Bunch your medical bills
Americans can only deduct medical expenses on their tax returns if their bills exceed 7.5% of their adjusted gross income.4 If you are close to clearing that hurdle, consider paying medical expenses now. For example, you might prepay your January health insurance premium, make doctors’ appointments now rather than early in 2023 and buy medical supplies and prescription drugs that qualify for the deduction.
6. Harvest investment losses
If you want to dump an investment loser, go ahead and sell it and pocket the capital loss. This loss can offset income that your overall portfolio has generated. You can use the capital loss to neutralize capital gains and up to $3,000 in ordinary income.5 If you can’t take advantage of the entire loss in one year, you can carry it forward to future years.
7. Donate appreciated investments to charity
Now may be a great time to donate stock or other securities with long-term capital gains directly to your favorite charity. If you sell a profitable investment and give the proceeds to a charity, you are subject to tax on the gain. If you transfer the investment to a charity instead, you avoid the tax and pocket a tax deduction based on the market value of the investment on the date of the donation.6
8. Capture a charitable deduction with a credit card
When you contribute to a charity by credit card, you will receive credit for the donation based on the date of the charge and not when you pay your bill. Consequently, you can donate via a credit card in December and capture the deduction in 2022 but pay the bill in January.7
9. Donate your IRA distribution
Retirees who must take yearly required minimum distributions from their Individual Retirement Accounts (IRAs) can donate up to $100,000 to a favorite charity in 2022 with their withdrawal.8 A donated distribution will not be treated as income for the taxpayer on their return if the required minimum distribution is made directly to the charity.
1 https://www.irs.gov/newsroom/irs-advisory-prepaid-real-property-taxes-may-be-deductible-in-2017-if-assessed-and-paid-in-2017
2 https://smartasset.com/mortgage/the-tax-advantage-of-making-an-extra-mortgage-payment-this-year
3 https://www.wsj.com/articles/SB1011379330927315400
4 https://www.irs.gov/taxtopics/tc502
5 https://www.irs.gov/taxtopics/tc409
6 https://www.tiaa.org/public/retire/services/preparing-for-retirement/giving/charitable-giving
7 https://www.consumerreports.org/charitable-donations/rules-for-last-minute-charitable-donations/
8 https://www.cnbc.com/2022/11/21/what-retirees-need-to-know-about-qualified-charitable-distributions.html
ABOUT THE AUTHOR
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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