Why It’s Not Too Early to Start Planning Your Year-End Tax Strategies

By Justin Setzekorn

People tend to think of tax planning as something to be done toward the end of the year. (Or even later, in some cases.) But if your goal is to limit what you’ll owe the IRS for 2022, an end of summer status check could help save you money.

Why? Some strategies that can help minimize your taxes take time to implement. If you wait until November or December to sit down and look at where you are—and where you want to be—you could miss out on important opportunities.

Because tax planning is so critical, it’s really never too early to get started. With that in mind, here are some tax strategies you may want to consider initiating sooner rather than later.

Maximizing Retirement Account Contributions

If you’re still working, maximizing contributions to your workplace retirement plan (a 401(k), 403(b), etc.) can help reduce your taxable income for this year—and, of course, help you bolster your retirement savings for the future. So if you have some unexpected breathing room in your budget, you might want to consider boosting your contribution amount for at least the next few months.

For 2022, the limit on salary deferrals to a 401(k) or similar plan is $20,500, with an additional catch-up contribution of $6,500 for those who will be 50 or older by the end of the year.  But if you can’t manage that much, even a small increase could have an impact.

Why do it now? Most workplace plans allow participants to change their contribution at any time, but it may take a couple of pay periods for the adjustment to take effect … and time is ticking. Though you have until your tax filing date (without extensions) to make contributions to a traditional or Roth IRA, salary deferrals for 401(k)s generally must be completed by the end of the calendar year.

Converting to a Roth IRA

Another strategy that may be worth considering this year is a Roth conversion.

Though you’ll have to pay income taxes on any funds you convert in 2022, the tax advantages of moving at least a portion of your retirement savings to a Roth are hard to ignore, including:

  • Going forward, the money in your Roth account will grow tax-free;
  • You won’t have to take required minimum distributions (RMDs) from the account when you turn 72 (or ever); and
  • If your income is too high to make direct contributions to a Roth IRA, you can use a conversion to get money into a Roth and enjoy the tax benefits.

Why do it now? Roth conversions aren’t particularly complicated, but the process must be completed by Dec. 31. If you talk to your Octavia wealth advisor about the pros and cons now, you won’t have to rush your decision or the process, and you can still meet that deadline.

Offsetting Gains with Tax-Loss Harvesting

Although tax-loss harvesting is another strategy that’s often discussed at the end of the year, it actually can be employed year-round. (And probably should be, given the markets’ ongoing volatility.)

In a nutshell, tax-loss harvesting allows you to:

  • Sell an underperforming investment at a loss;
  • Replace it with a similar investment that meets your asset allocation needs; and
  • Use the loss from the sale to offset your investment gains, so that less of your money goes toward paying taxes and more of it keeps working for you.

Why do it now? There are a lot of dos and don’ts to consider with this tax-loss harvesting strategy—and if you make a mistake, you risk running afoul of both IRS rules and your own investment goals. This is one you’ll want to take your time with … or, better yet, leave to a pro.

Charitable Giving with Donor Advised Fund

If giving is important to you, but changes put in place by the Tax Cuts and Jobs Act (TCJA) are making it difficult for you to deduct charitable donations on your return, you may want to consider establishing a donor advised fund (DAF) in 2022.

Using a DAF, you can maximize your charitable tax deduction in 2022 by bundling multiple years’ worth of donations into one supercharged gift that puts you over the TCJA threshold for itemizing your deductions. Your DAF’s sponsoring organization will have legal control over the assets in your fund; but you still can have a say in how the money is invested, as well as which charities will receive grants and when.

Another plus: You don’t have to write a big check to establish a DAF. Besides cash, you can donate securities, real estate and other assets. This strategy also can be used to reduce your capital gains tax burden.

Why do it now? Setting up a donor advised fund is relatively easy, but you’ll want to give yourself plenty of time to find a reputable sponsoring organization that’s a good fit for your giving goals.

Investing in Opportunity Zone Funds

If you’re up for more research—and more potential risk—you also may want to look into the tax benefits of investing in Opportunity Zones this year.

This strategy is based on a fairly new IRS rule that allows capital gains taxes to be delayed, or even avoided, if the gains are reinvested into special funds created to improve economically distressed communities. The idea is that while these designated communities benefit from revitalization, investors can get a tax break for providing the money to make those efforts possible.

Why do it now? Investing in opportunity zone funds is a complex strategy, and it’s still evolving. The tax benefits are based on when you get in and how long you hold your investment, so you should be confident the timeline makes sense for your overall goals. If you’re interested, you’ll want to be sure to talk it through with your Octavia advisor.

Ready to Get Started?

Tax planning is a key part of any comprehensive financial plan—whether you’re just starting out, in your peak earning years or happily retired. That’s why Octavia’s method of integrated tax planning seeks out tax-saving opportunities across every aspect of your financial life. Schedule time now to meet with your Octavia wealth advisor to discuss the exemptions, deductions, deferments, and benefits available to you this year before it’s too late.

Please see Important Disclosures.