Year-end tax moves from a financial planner

Range Certified Financial Planner
Range Certified Financial Planner
November 28, 2022

The end of the year is a busy time, but it's also an excellent opportunity to make some final tax moves that can save you money.  Here are a few tips from a financial planner on how to get the most out of the last month of tax season.

Review your 401(k)

If you have not yet maxed out your 401(k) contributions for the year, now is a great time to review your account and make any necessary changes.  For 2022, the maximum employee contribution is $20,500 or $27,000 for those 50 and older.  

Since traditional 401(k) contributions are made with pre-tax dollars - the additional deferrals will immediately reduce your taxable income for the year.  This can be especially impactful for those who are close to the next lowest tax bracket.  Lower taxable income and a lower marginal tax rate?  That’s what we call a win-win!  

With the IRS deadline quickly approaching (Dec 31 or your final paycheck) we recommend getting in touch with your payroll department ASAP.  Most employers need a week or more to change your contributions.  They can also confirm rules specific to your company (i.e. only 50% of each paycheck can be used for 401(k) deferrals).

Consider tax-loss harvesting

Tax-loss harvesting is the process of selling investment assets at a loss in order to offset capital gains and lower your tax bill.  The IRS imposes a $3,000 limit on the amount of capital losses that can be deducted from income in any given year, but losses above that amount can be carried forward and applied to future tax years.

For example, if you sell a stock for a $10,000 gain and sell another for a $5,000 loss then you will only owe capital gains tax on the net gain of $5,000.  If instead,  you sell a stock for a $10,000 loss and another for a $5,000 gain then you can reduce your ordinary income by $3,000 (IRS limit) and carry the excess net loss of $2,000 to future years.  

To successfully implement this strategy it’s important to reinvest the proceeds from the sale of these investments.  Just be careful not to repurchase the same investment that you sold for a loss within 30 days or else you’ll trigger what’s known as a “wash sale” and the losses you carefully harvested will be disallowed.  

Set up a Donor-advised fund (DAF)

The holidays are a time for giving and Donor-advised funds are a popular way to give charitably.  They provide an immediate tax deduction and allow you to recommend distributions from the fund over time.  The first step is to open an account and make an initial contribution which can be done at most major financial institutions.

You can think of a DAF as “pre-paying” any planned charitable contributions to maximize the tax benefit.  For context, in order to deduct charitable contributions on your taxes, you must itemize deductions rather than take the standard deduction ($12,950 if single, $25,900 if married).  By utilizing a DAF, you’re effectively grouping several years of charitable gifts into a single tax year which will allow you to exceed the standard deduction threshold and make itemizing worthwhile.  The fund is then invested however you’d like (think brokerage account), grows tax-free, and can be used for donations to any IRS-qualified public charities at a later date.

We know the end of the year can be extremely busy - but it’s also a great time to reflect and prepare yourself for financial success. Read more here on ‘How can I be smart when giving to charity?

Range is here to help.

With Range, you can work with our team of Certified Financial Planners and get answers to all your money questions.  

Get started with Range today

Disclaimer: The above blog post is for informational purposes only.  We recommend working with a trusted CPA when preparing and filing your taxes.

Book a Demo
Explore More