General tax planning strategies for individuals include accelerating or deferring income and deductions and carefully considering timing-related tax planning strategies concerning investments, charitable gifts, and retirement planning. For example, taxpayers might consider using one or more of the following strategies:
INVESTMENTS. Selling any investments on which you have a gain (or loss) this year. See Investment Gains and Losses below for more on this.
YEAR-END BONUS. If you anticipate a higher taxable income in 2022 (e.g., you are retiring in 2023), and are expecting a bonus at year-end, try to get it before December 31 to reduce your tax liability in 2022. Bonuses are taxed differently than wages. For most people, the rate is 22 percent; however, for payments exceeding $1 million, the rate is 37 percent.
Contractual bonuses are different in that they are typically not paid out until the first quarter of the following year. Therefore, any taxes owed on a contractual bonus would not be due until you file your 2023 tax return in 2024. Please call the office if you have any questions about this.
CHARITABLE DEDUCTIONS. Bunching charitable deductions every other year is also a good strategy if it enables the taxpayer to get over the higher standard deduction threshold under the Tax Cuts and Jobs Act of 2017 (TCJA). Another option is to put money into a donor-advised fund that enables donors to make a charitable contribution and receive an immediate tax deduction. A public charity manages the fund on behalf of the donor and, in turn, recommends how to distribute the money over time. Don’t hesitate to call if you want more information about donor-advised funds.
MEDICAL EXPENSES. Medical expenses are deductible only to the extent they exceed a certain percentage of adjusted gross income (AGI); therefore, you might pay medical bills in whichever year they would do you the most tax good. In 2022, these medical and dental expenses must exceed 7.5 percent of AGI. By bunching medical expenses into one year rather than spreading them out over two years, you have a better chance of exceeding the thresholds, thereby maximizing the deduction.
Deductible expenses such as medical expenses and charitable contributions can be prepaid this year using a credit card or check. You can only deduct the medical and dental expenses you paid this year – not payments for medical or dental care you will receive in the future. For example, suppose you charge a medical expense in December but pay the bill in January. Assuming it’s an eligible medical expense, you can take the deduction on your 2022 tax return.
STOCK OPTIONS. If your company grants stock options, you may want to exercise the option or sell stock acquired by exercising an option this year. Use this strategy if you think your tax bracket will increase in 2023. Generally, exercising this option is a taxable event; the sale of the stock is almost always a taxable event.
INVOICES. If you’re self-employed, send invoices or bills to clients or customers this year to be paid in full by the end of December; however, make sure you keep an eye on estimated tax requirements. Conversely, if you anticipate a lower income next year, consider deferring sending invoices to next year.
WITHHOLDING. If you know you have a set amount of income coming in this year that is not covered by withholding taxes, there is still time to increase your withholding before year-end and avoid or reduce any estimated tax penalty that might otherwise be due.
Avoid the penalty by covering the extra tax in your final estimated tax payment and computing the penalty using the annualized income method.