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5 Strategies for Managing your Tax Bill

As we are nearing the end of 2022, now is a good time to consider strategies to help keep your tax bill down.

Here are five ideas…

Consider increasing your retirement savings.

Contributions to a tax-deferred retirement savings account reduce adjusted gross income (AGI) as long as they are within the designated limits. So, depending on your age and adjusted income, increasing retirement savings might reduce your tax bill.

Take a look at your charitable contributions.

If you itemize your deductions, recent changes to tax laws may allow you to deduct the full amount of your cash contributions to charity. This is as long as the deduction does not exceed permissible percentages of your AGI. Any contributions exceeding the AGI limits can be carried forward and applied over the next few years. This could have a positive effect for you. Allowing for a higher tax deduction as a percent of AGI could contribute to a lower tax bill. This tip especially makes sense for those of you who itemize. Check with your tax advisor for current standard deductions based on filing status. Your status could be single taxpayers or married couples who file jointly.

Speaking of charitable giving, open a Donor-Advised Fund.

You can put your money or other assets, such as stocks or personal property, in a Donor-Advised fund. This allows you to deduct the entire contribution in the year you make it. You then can decide later how you want to dole it out to charities of your choice. Contributing one lump sum this year might help lift your deductions above the amount of the new standard deduction and allow you to itemize.

Protect your Social Security benefits.

If you are receiving social security benefits, you might have to pay taxes on them. If your combined income (which is primarily your AGI plus any tax-exempt interest income plus half of your Social Security benefits) exceeds certain levels. To protect your benefits, watch the amount of interest you receive from municipal bonds. In addition, you might want to delay discretionary taxable distributions from a retirement plan.

Lastly, consider con­verting some or all of your money from a traditional IRA to a Roth IRA.

You’ll pay taxes on the conversion (minus any portion that represents nondeductible IRA contributions), but the money will grow tax-free in the Roth after that. There are other advantages as well. The converted assets can be withdrawn tax-free at any time after 5 years. You are also not required to take any minimum distributions in retirement.

No matter what strategies you use to keep your tax bill down, it is important to keep in mind many things. Although the tax code continues to evolve, your goals and risk tolerance, not just the income tax impact of your investments, should drive your investment decisions.

Investment Account Manager 3 (since 1985) is a Windows desktop-based software program that provides investors with the comprehensive features necessary to properly manage investment portfolios for long-term investing success, while helping to plan and manage tax consequences of your investing decisions.

A free 60 day demo version (no credit card required) is available on our website: Investment Account Manager