It's no secret that smart timing of income and deductions can go a long way toward reducing your tax liability. That's among many reasons why year-end tax planning is such a critical part of the financial planning process. For example, if you are in a higher tax bracket this year than you expect to be next year, there are several strategies you may want to consider now to help reduce your 2021 taxable income. These might include maximizing retirement plan contributions or bunching charitable deductions, among others.
If you expect to see an increase in your marginal tax rate in 2022, due to an increase in income or a change in the tax laws, you may want to take a different approach that could include accelerating income into the current tax year.
Whether you expect to be in a higher, lower or the same tax bracket in 2022, below are five key areas to focus on as we approach year-end.
- Maximize retirement account contributions
- Consider a ROTH conversion
- Harvest investment losses
- Take advantage of unique charitable giving opportunities
- Use intrafamily loans for multigenerational asset transfer
1. Maximize retirement plan contributions?
If you're still working, maximizing contributions to any qualified retirement plans you are eligible to participate in, such as a 401(k), 403(b), individual retirement account (IRA) or SEP IRA, can help reduce taxable income.
Making pre-tax contributions to tax-deferred workplace retirement plans and IRAs has the potential to substantially increase the amount of retirement assets you accumulate since you postpone paying federal and state tax on the initial contributions until such time that those amounts are distributed from your retirement account. In the meantime, any future earnings from your contributions can continue to grow on a tax-deferred basis. Those age 50 and older are also eligible to make catch-up contributions.