Year-End Tax Planning, Part 1
When it comes to cutting taxes, there is a huge difference between December 31st, and one day later. With only a couple weeks left in 2022, it’s time to review your options to cut taxes before the end of the year.
A quick Google search will give you a litany of typical suggestions to reduce your taxes, like:
- Maximize your 401(k) or other retirement saving plans
- Contribute to Traditional IRA Savings plan
- Fund your HSA
- Make charitable contributions
- Harvest investment losses
- Prepay property taxes and future medical expenses
- Defer receipt of bonus or salary compensation
In addition to the above, Business Owners can:
- Defer customer deposits and prepay business expenses
- Make equipment or asset purchases
- Make qualified business property improvements
- Make retirement plan contributions
All of the above will indeed reduce your current year tax bill coming April 18th; however, all require a “money” decision – free cash flow. Prepaying expenses maybe a good strategy for someone who has residual income, but maybe not for the person sticking to a regimented budget. Simply said, cash investments (spending) are required to take advantage of most tax breaks. It’s the basic premise of the tax code – tax breaks are related to the economic stimulus that corresponds to the current government’s agenda; which beginning tax year 2023, will be heavily focused on climate, green energy and related tax credits.
The best approach to a solid tax reduction and ultimately, a wealth accumulation strategy; is knowing how to change the character of your income from taxable to tax-free, understanding tax credits vs. deductions, and knowing your tax bracket. Let us know your thoughts about creating tax-free income streams.
