From the Timing of Charitable Donations to the Unloading of Money-Losing Investments, there's Plenty that Can Be Done to Reduce this Year's Tax Burden
By Saghir A. Aslam
Rawalpindi, Pakistan
(The following information is provided solely to educate the Muslim community about investing and financial planning. It is hoped that the Ummah will benefit from this effort through greater financial empowerment, enabling the community to live in security and dignity and fulfil their religious and moral obligations towards charitable activities)
It's time to make year-end tax moves. With inflation way up and markets way down for 2022, there's plenty to track.
As in the past, most actions for tax-year 2022 must be made before January 1, 2023. The main exceptions: Contributions to traditional IRAS, Roth IRAs and Health Savings Accounts for 2022 can often be made until April 18, 2023, next year's tax deadline. Some self-employed taxpayers can make 2022 contributions to Solo 401(k)s until October 16, 2023.
Here are areas to focus on now.
Check withholding and estimated taxes . Inflation has pushed the penalty on tax underpayments to 6%. On Jan 1, it will likely rise to 7%, far above the 4% rate earlier this year. So, check withholding or quarterly estimated taxes, especially if your income has been un-even or included a windfall.
Most filers must pay 90% of their taxes long before the April tax deadline to avoid the penalty. The due date is Dec 31, 2022, for employees and Jan 17, 2023, for those making fourth-quarter 2022 estimated payments.
Employees who raise their paycheck withholding late in the year often escape underpayment penalties for the entire year, and the IRS has posted a calculator to help figure withholding. Retirees and self-employed taxpayers must do their own assessments.
What if you're headed for a big 2022 refund? Given IRS backlogs and snafus, consider lowering withholding or estimated tax payments to minimize headaches if the refund is delayed.
Standard deduction or itemized? Assess your deductions. Filers can reduce taxable income by subtracting one overall amount called the standard deduction, or by detailing "itemized deductions for mortgage interest, state and local taxes, charitable donations, medical expenses and others.
For 2022, the standard deduction is $25,900 for married joint filers and $12,950 for single filers. Inflation has lifted the amount for 2023-to $27,700 for married joint filers and $13,850 for single filers-something to keep in mind for planning purposes. (Filer’s age 65 or older get at least $1,400 more each for 2022 and $1,500 more for 2023.)
Filers taking the standard de-duction for 2022 or 2023 should evaluate whether it makes sense to "bunch" deductions to benefit from itemizing in some years.
Often the best candidates for bunching are charitable donations. This move is harder for medical expenses, as many filers don't have expenses greater than the 7.5% income threshold. For those who do, the service must be completed in the year of the deduction so a parent can't pay the full bill for a child's orthodontia and deduct it for 2022 if the work isn't finished until 2023.
To be continued.
This article is written in collaboration with Walt Hommerding senior vice president investment of Wells Fargo .
(Saghir A. Aslam only explains strategies and formulas that he has been using. He is merely providing information, and NO ADVICE is given. Mr Aslam does not endorse or recommend any broker, brokerage firm, or any investment at all, nor does he suggest that anyone will earn a profit when or if they purchase stocks, bonds or any other investments. All stocks or investment vehicles mentioned are for illustrative purposes only. Mr Aslam is not an attorney, accountant, real estate broker, stockbroker, investmentadvisor, or certified financial planner. Mr Aslam does not have anything for sale.)
