Year-End Tax Planning, Part 1

When it comes to cutting taxes, there is a huge difference between December 31^st, and one day later. With only a couple weeks left in 2022, it’s time to review your options to cut taxes before the end of the year.

A quick Google search will give you a litany of typical suggestions to reduce your taxes, like:

Maximize your 401(k) or other retirement saving plans
Contribute to Traditional IRA Savings plan
Fund your HSA
Make charitable contributions
Harvest investment losses
Prepay property taxes and future medical expenses
Defer receipt of bonus or salary compensation

In addition to the above, Business Owners can:

Defer customer deposits and prepay business expenses
Make equipment or asset purchases
Make qualified business property improvements
Make retirement plan contributions

All of the above will indeed reduce your current year tax bill coming April 18^th; however, all require a “money” decision – free cash flow. Prepaying expenses maybe a good strategy for someone who has residual income, but maybe not for the person sticking to a regimented budget. Simply said, cash investments (spending) are required to take advantage of most tax breaks. It’s the basic premise of the tax code – tax breaks are related to the economic stimulus that corresponds to the current government’s agenda; which beginning tax year 2023, will be heavily focused on climate, green energy and related tax credits.

The best approach to a solid tax reduction and ultimately, a wealth accumulation strategy; is knowing how to change the character of your income from taxable to tax-free, understanding tax credits vs. deductions, and knowing your tax bracket. Let us know your thoughts about creating tax-free income streams.