The Illinois CPA Society offers six money moves to make before the end of the year to create some tax-time savings.
CHICAGO, Nov. 29, 2022 – The holiday season may have you hunting for those perfect gifts for your loved ones, but the Illinois CPA Society reminds you that there are opportunities to gift yourself something special, too. For the financially minded, time is running short to make important year-end money moves that could help the holiday cheer last through tax season. Here are six tips to consider that could gift you a lighter tax burden, a bigger tax refund, or a better financial position for the year ahead.
1. Max out your HSA: With health and health care costs still top of mind, a tax-smart way of setting aside money for qualified medical expenses and lowering your taxable income is to contribute the maximum allowed (or the maximum you can manage) to a Health Savings Account (HSA). HSAs offer several advantages: You pay no federal taxes on your contributions, no federal taxes on investment earnings, and no taxes on withdrawals if the money is used for qualified medical expenses. In 2022, the contribution limit is $3,650 for individuals or $7,300 for families; an additional $1,000 catch-up contribution is allowed for taxpayers age 55 or older. HSA contributions can be deducted through payroll, or direct contributions can be made to ensure the maximum is met.
2. Boost your retirement contributions: While figuring out your holiday shopping budget, take a moment to figure out your retirement budget. The end of the year is a great time to see how much you’ve put away for retirement savings so far and see how much more you can potentially tuck away. Contributions to tax-deferred retirement accounts—like your employer’s 401(k) or 403(b)—reduce your taxable income, thus lowering your tax bill, and grow tax-free until distributions begin. The contribution limit for employees in 2022 is $20,500, or $27,000 if you're age 50 or older. For participants in a SIMPLE IRA, the 2022 contribution limit is $14,000, with an additional $3,000 catch-up contribution allowed for those age 50 or over. For those contributing to IRAs outside of employer-sponsored accounts, the contribution limit to an individual Traditional IRA remains $6,000, and an additional catch-up contribution of $1,000 is allowed for individuals age 50 and over.
3. Set up a self-employed retirement plan: Whether you’re newly self-employed or have been running your own business for years, setting up a Simplified Employee Pension (SEP) plan for yourself can give your personal finances a shot in the arm. Self-employed individuals can lower their taxable income by contributing up to 25 percent of their self-employment income (up to $61,000 for 2022) to a SEP IRA. Your SEP IRA must be established by your company’s tax filing deadline (plus any extensions) for the tax year in which the qualifying contribution is made.
4. Harvest investment losses: It’s no secret that the market has been naughty this year. If you have investments (i.e., stocks, bonds, mutual funds) in your taxable accounts that have declined in value since purchase, you can sell them to realize the loss, which will offset any realized capital gains and also reduce your taxable income. Try to sell these investments by December 27 to ensure the transactions settle before the end of the year. Capital losses offset capital gains without limitation, and an additional $3,000 of realized losses can offset other income—anything above will be passed to the next tax year. Just be aware of the wash sale rule—buying back the same shares of stock or using the proceeds to buy shares of a substantially identical company within 30 days will defer the realized loss.
5. Give a gift: Being gift-giving season, why not give a gift that also gifts you a lower tax burden? If you have wealth that you’d like to pass on to loved ones or other beneficiaries, you can gift up to $16,000 to as many people as you’d like this year without paying a gift tax or reducing your lifetime gift and estate tax exemption. Such gifts can be used for any number of things, like funding a grandchild’s 529 college savings plan (you can gift up to five years at once to a 529 plan, or $80,000 up front), helping a family member with a down payment on a home, or other financial goals. Make these gifts by December 31.
6. Buy I bonds to reduce inflation’s bite: If your savings isn’t earning enough interest to keep pace with inflation, you’re losing money! Series I savings bonds, issued by the U.S. Treasury, protect you from inflation by earning both a fixed rate of interest and a rate that changes with inflation. Individuals can purchase up to $10,000 in I bonds electronically per calendar year, and an additional $5,000 in paper I bonds can be purchased when you file your federal tax forms. What’s more, the interest earned on I bonds is exempt from state and local taxes (and may even be exempt from all taxes if used for qualified higher education expenses).
The Illinois CPA Society reminds that while everyone’s financial wellness and tax position is different, certified public accountants (CPAs) can help taxpayers strategically manage their personal finances and prepare and file their tax returns. The Illinois CPA Society’s free “Find a CPA” directory can help you find the trusted, strategic advisor that’s right for you based on location, types of services needed, and languages spoken. Find your CPA at www.icpas.org/findacpa.