This post was updated in 2022 to reflect current tax implications.
While it’s important never to cut corners and risk an audit, there are plenty of ways to reduce your tax rate that the IRS encourages legally. Deductions and tax laws are made to enable citizens to save, so take advantage of every opportunity you can. Here are a few of the best tax planning strategies for high-income earners.
Prepare for Changing Tax Laws
There has been discussion around tax law changes. It’s important to stay on top of the tax landscape and see what proposals are being mentioned. It’s hard to read the wind on what’s actually going to become law.
Remember, until proposed changes become law, there is no need to rush to make changes to your finances or investments. Stay informed about these changes, and talk to your advisor first if you believe you will be impacted.
Standard deductions have increased for the upcoming tax season. For 2022 taxes, single filers may claim a $12,950 standard deduction, while married couples filing jointly can claim a $25,900 standard deduction. This is an increase of $400 for single filers and $800 for married couples, compared to 2021 amounts.
If in the past you have itemized deductions—including charitable contributions— this year, these same contributions may not exceed the standard deduction.
One of the best tax planning strategies for charitable contributions includes donating appreciated non-cash assets held for more than one year. Most of the time, you will be able to eliminate the capital gains tax you would otherwise incur if you sold the assets and donated the proceeds.
Another strategy is to open a donor-advised fund account before the end of the year and begin making tax-deductible contributions now.
Talk to your advisor about how to donate to a charity in the most tax-beneficial way.
The landscape on tax legislation is always changing. It’s important to take advantage of the opportunities you have during the current year to maximize opportunities in the future. Below are some of the most common ways people are making smart retirement decisions on their tax returns.
- Convert to a ROTH IRA if you’re in a lower tax bracket. If you are in a lower tax bracket than you were last year, you may want to consider converting from a traditional to a ROTH IRA. This allows you to take advantage of your lower tax bracket now and enjoy tax-free income when you retire. Current tax law is set to sunset in 2025 and tax rates will likely increase as a result. Now is a great time to start planning systematic conversions.
- Check to see if your 401K has access to after-tax contributions that can be converted into Roth dollars. This is one of the most-recommended tax planning strategies for high-income earners. You could maximize your contributions above the standard $19,500 annual contribution by funding after-tax dollars up to $58,000 (2021) and immediately converting them into your Roth 401K bucket. This could give you access to more retirement funding while utilizing tax-free growth.
Optimize Your 401(k)
This year the IRS increased 401(k) and 403(b) contribution limits — the first time this has been done since 2018. Individuals can contribute up to $20,500 to their 401(k) for 2022. If your current cash flow does not allow you to maximize contributions, consider increasing your contribution rate from 1% to 2% for the upcoming year.
This is also a great time to rebalance your portfolio if you haven’t in the past year or so. This ensures your portfolio is not taking on more (or less) risk than you are willing to take.
Note: the catch-up contribution for participants ages 50 and up remains unchanged at $6,500.
Health Savings Accounts
If you have a high-deductible health insurance plan, you may be able to receive special tax deductions in 2022. In addition, with a health savings account (HSA), you can make 100% tax-deductible contributions to your future retirement healthcare plan.
HSA contribution limits increased in 2022 to $3,650 for individuals and $7,300 for families. Catch-up contributions are allowed for those 55 and older and can increase your tax-deductible amount by $1,000. How much you contribute will not only affect your taxes this year but will keep you secure for the future.
The funds in an HSA can be invested and grow just like your retirement savings; however, a major bonus is that withdrawals for qualified medical expenses are tax-free too. So if you are expecting higher medical bills in the future, talk to a tax advisor now about your different options.
Talk to An Advisor Today!
Your best option for moving forward is to stay vigilant and make the most of your tax options. The better you prepare now, the more secure you’ll be for retirement. Financial security is of the utmost importance no matter how old you are or how much you earn each year.
OneAscent can also help you prepare for the future with investment and retirement options that keep your and your family’s future in mind. To learn more about our investment strategy and opportunities for individuals and families, contact us.