- Tax season is just around the corner, which means it’s time to look for last-minute tax breaks
- Although the tax rate has not changed, the amount of each tax (a share of income) has been adjusted in line with inflation.
- For margin investors, last-minute credits, deductions and losses can put you in a lower bracket.
Folks, we’ve made it – it’s December 2022. It’s time for holiday cheer, winter weather…and year-end tax preparation.
Okay, so preparing your finances for tax season is less fun than the other two. But for investors, this is the last chance to reduce your liability to Uncle Sam.
To help you prepare, we’ve highlighted federal income and capital gains tax rates for 2022. We’ve also prepared some tips to help you make last-minute decisions.
2022 federal tax bill
Every year, the IRS releases a revised tax return so that taxpayers know what to expect by April 15th. Below, we’ve highlighted four charts that show your expected tax liability based on your income and filing status.
Keep in mind that the IRS uses progressive taxation, which means that as your income increases, so does your tax bill. But it doesn’t all rise equally.
For example, if you are a single filer and earn $90,000, your maximum tax rate is 24%. But as you can see from the table above, you will pay four different tax rates:
- 10% on amounts under $10.2765
- 12% on amounts between $10,275 and $41,775
- 22% on amounts between $41,775 and $89,075
- And 24% on income between $89,076 and $90,000
This makes a big difference to your tax bill. Instead of paying $21,600 – 24% of your total income – your tax bill will be closer to $15,435. (And that’s before taking into account the standard deduction or qualified tax credit.)
Profits in 2022 are part of the tax
Investors must also consider the impact of capital gains taxes on their annual bills.
Capital gains tax is charged on “real” assets, or those sold for a profit. In other words, if your portfolio goes up, you don’t have to pay taxes if you don’t sell. (Although there are a few exceptions, such as dividend payments.)
There are two types of capital gains taxes to consider: long-term and short-term.
Long-term capital gains tax rates
Long-term capital gains are taxed on assets you have held for at least one year. They are generally taxed more than short-term gains at 0%, 15% or 20%, depending on your income.
* Please note that some high net worth taxpayers will pay an additional 3.8% tax on their investments.
Short-term capital gains tax rates
In contrast, short-term capital gains are taxed on assets that you have held for a year. Unfortunately, short-term income results in a larger tax bill, as it is taxed at ordinary income rates between 10% and 37%. (You can use the federal income tax bracket above to determine your short-term income tax rate.)
Do you want to move to a lower tax area?
If your tax bill is too high (and let’s face it, we all think it is) investors can make last-minute moves to target lower taxes.
Your success depends on two main factors:
- Deductions and reductions in your income
- How far are you from the bottom edge of your bracket
Note that you need to take these actions before December 31, 2022 to enjoy the breaks in the current year. So, if you haven’t gotten your head around it yet, it’s time to get cracking.
Pay now for next year’s bills
In some cases, you may be able to lower your tax bill by taking the deduction next year. For example, you can speed up deductions by:
- Payment of state income or tax is due in January
- Paying extra for medical bills can reduce your tax bill
- Note: You can only claim unpaid medical bills that exceed 7.5% of your adjusted gross income.
- Make additional charitable contributions (up to the annual limit)
- Note: Must keep receipt of all charitable contributions to count them on your taxes
- If you are old enough to take minimum distributions (RMDs) from your retirement account, you can also donate those payments to charity.
- Pay tuition in advance to enjoy un-itemized tax break or claiming the American Opportunity Tax Credit or Lifetime Learning Credit
Adjust your itemized deductions
When it comes to tax deductions, taxpayers have two options:
- Take the standard deduction of $12,950 for a single filer or $25,900 for a joint filer
- Or write off your expenses if they exceed the standard deduction
If you’re on the verge of summing up, you may be able to lower your tax bill this year through deductibles. Basically, bunching involves spending as much money as you can in a year. Then, in future years, you can reduce your deductible expenses and claim the full standard deduction, regardless of your annual expenses.
By saving up one year and deducting your expenses the next, you can reduce your long-term tax liability and keep more money.
Try not to push the minimum tax
The Alternative Minimum Tax (AMT) is designed to ensure that wealthy taxpayers can’t get their entire tax bill out. The AMT is the same as your regular tax bill, and you pay what’s appropriate top if you qualify.
But not everyone does. Generally, you’ll trigger the AMT if your income exceeds the exemption amount for 2022 ($75,900 for a single filer, $114,600 for a joint filer) and you use the standard deduction. . Depending on where your income falls, you may pay an AMT tax of 26% or 28%.
The AMT is particularly complicated because it includes income that does not qualify under the statutory tax rules. On the other hand, it eliminates the standard deduction, as well as the usual standard deductions.
If you find yourself subject to the AMT, you can avoid paying bills or taking deductions – you won’t get a credit for them.
Take the tax loss
Tax loss harvesting is a big event for many investors in December. Basically, this strategy sells investments at a loss to offset taxable gains.
Because losses offset investment gains dollar-for-dollar, they have the power to lower your tax bill. Plus, if your losses exceed your gains, you can write off up to $3,000 in other income to further lower your amount. If the year is really bad, you can even carry those losses forward into the next year.
However, be aware of the “wash-sale” rule. Wash sale rules require you to wait 30 days before you can refinance or buy a “substantial equivalent” investment to claim your loss.
Additionally, you can’t use loss harvesting in tax-advantaged accounts, including traditional or Roth 401(k)s or IRAs.
Increase your retirement income
Talking about retirement.
One great way to lower your tax bill while planning for the future is to make the most of your tax-advantaged accounts.
Not only can you reduce your tax bill this year by contributing to a traditional retirement account, you’ll enjoy tax-free growth until retirement.
Alternatively, you can pay tax on your retirement income now and enjoy tax-free withdrawals when it’s time to leave work.
Your maximum contribution may depend on the type of plan you use and your income.
For 2022, your maximum 401(k) contribution is $20,500 for those under 50 or $27,000 for those over 50.
Traditional IRAs and Roth IRAs have a maximum contribution of $6,000 per year, or $7,000 if you’re over 50. However, if your income is more than $144,000 ($214,000 for partners), you may not be able to contribute to a Roth IRA.
Make sure your retention adds up
One of the most important steps you can take to lower your tax bill – and the associated penalties – is, ironically, to insure your wages.
Whether you are a W-2 employee or a 1099 filer, you must pay taxes throughout the year. In some cases, if you don’t meet the annual tax payment requirements, the IRS will charge you a penalty.
To make sure you’re on track, you can use the IRS’s Tax Withholding Estimator to determine if you need to update your withholding or quarterly tax payments. If you have to choose between overpaying and receiving taxes and underpayments and penalties, taxes seem better.
Take care of your tax documents from Q.ai
Nobody likes paying the piper (in this case, Uncle Sam). If you are looking for a legal way to remove your tax bracket, these tips may help.
As tax season approaches, you also don’t want to forget the role your Q.ai investments play in your financial picture.
Every year, Q.ai sends your 1099 tax form to your account so you can see what you owe – and what you can write off. (Note that you will only receive a 1099 if you started trading in the last calendar year. You may also receive a 1099-DIV if you received dividends.)
These tax documents will appear on your account in mid-February. You can access them by:
- clapped Account settings in the upper left corner of your dashboard
- Click on Tax Documents
- Save documents directly from your app to your phone, or share with important contacts in your phone or email list
Keep an eye out for alerts in your email and portal – and happy hunting (for tax breaks).
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