It’s tax season! What should pre-retirees in Greeneville, TN know about their tax planning between January and April of 2022 and beyond? 

Read on for our top tips.

1. Maximize your retirement fund contributions to traditional 401(k)s and IRAs

One of the most important ways to reduce your taxes is to participate in tax-advantaged retirement funds. Plus, of course, they are excellent vehicles for funding a comfortable retirement, which is coming up for Generation X! 

You should contribute the maximum you can for both reasons, especially if your employer offers a matching 401(k), which can as much as double the amount of your own contribution. 

Let’s Discuss Ways You Can Jump-Start Your Tax Planning in 2022!

If your employer offers a 401(k) or similar plan, you may be able to reduce your taxable income overall, because 401(k) contributions are generally taken out of your paycheck pretax. Reducing your taxable income is one of the most efficient ways to lower your taxes. 

For 2021, the maximum 401(k) contribution is $19,500. For 2022, the maximum will rise $1,000, to $20,500. If you are 50 and over, by the way, you are entitled to an addition $6,500 each year.

If you don’t have access to a 401(k) or similar defined contribution plan, Individual Retirement Accounts (IRAs) are also excellent tax-advantaged retirement plans. You can contribute as much as $6,000 in both 2021 and 2022, with a catch-up contribution of $1,000 each year if you’re 50 or older.

If you contribute to a traditional IRA, you can deduct the amount of your contribution from your income, which lowers your adjusted gross income (AGI). The AGI is the figure you use to determine your taxes for the year, so a lower one reduces your tax burden.  

All the money in both types of accounts grows tax-free until you withdraw it at retirement. At that point, it will be taxed at your then-existing tax rate. 

Be sure to avoid tax penalties on your traditional retirement accounts. If you withdraw money from traditional 401(k)s or IRAs before the age of 59 ½, the Internal Revenue Service (IRS) will hit you with a 10 percent early withdrawal penalty. That’s in addition to the regular taxes on the amount withdrawn.

2. Consider contributions to Roth 401(k)s and Roth IRAs

While you can’t benefit from a tax advantage by a contribution to a Roth 401(k) or Roth IRA in the year of contribution, these types of accounts do have tax benefits worth thinking about for Generation X! 

Roth retirement accounts differ from traditional retirement accounts in terms of the timing of the taxation. Roth 401(k)s and Roth IRAs do not provide tax advantages at the time of contribution because contributions are made with after-tax income. 

Instead, the tax advantages are realized when you withdraw the funds at retirement! Roth 401(k) and Roth IRA withdrawals are not taxed then at all, as long as you’ve held the money for at least five years. In addition, the money invested grows tax-free.

There’s a final benefit to think about as you consider retirement. When you turn 72, the government will require that you take required minimum distributions (RMDs) from your traditional retirement accounts. RMDs are designed to draw down the money in your expected lifetime, as determined by actuarial tables.

But what if you live longer? Many people like to have at least some retirement accounts that aren’t subject to RMDs, so they have the security of retirement accounts they can withdraw on whatever timetable they prefer. Roth accounts fit that bill: they are never subject to RMDs.

3. Maximize your deductions

The standard deduction for a married couple filing jointly is $25,900. That may mean that, for many people, there is no need to itemize deductions to save on taxes.

However, there are situations where your allowable deductions may exceed that amount, too. Consider whether your allowable deductions exceed that amount this year. 

Medical expenses above 7.5 percent of your AGI are deductible, as are charitable contributions to public charities up to 60 percent of your AGI. Mortgage interest on home loans up to $750,000 is deductible, as are some points if you’ve purchased a home in 2021. 

If you’ve had a specific situation, such as selling your house, you may have large tax exclusions as well. If you sold a primary residence, the proceeds are taxable, but you can exclude up to $500,000 if you are married and file a joint return.

4. Consider an educational savings plan 

If you have children or grandchildren going on to higher education, a tax-advantaged 529 plan can not only pay for tuition, board, and other expenses but may be able to save you on taxes. The money generally grows tax-free.

5. Gift money to your family

Despite the pandemic, 2021 was a good year economically for many people, with high employment and a strong stock market. If you are flush with cash and investment proceeds, consider gifting it to friends and family now rather than bequeathing it in a Will or Trust.

Individuals can gift up to $15,000 each year to friends or family members in 2021, without incurring the gift (or any) tax. The figure will rise to $16,000 in 2022. 

If the people you’re giving to are likely to be beneficiaries of your will and to receive some of your estates, tax-free gifting every year allows you to, essentially, bequeath your estate in small amounts over time, while realizing tax benefits every year.

There is a lifetime cap on the gifting of $11.7 million for 2021 that will rise to $12.06 million this year; over that amount, taxes do kick in. 

6. Plan capital gains and losses

If you currently have unrealized losses in your portfolio, you could sell them to offset any capital gains and thus avoid or minimize capital gains tax. Remember that you need to let a minimum of 31 days elapse before you purchase a holding again, to avoid violating the wash sale rules.

Some experts believe the capital gains tax rate is likely to rise in the future. It’s prudent to discuss capital gains/losses planning with a tax professional, particularly whether any losses will be more advantageous in future years.

Contact Sapiat Asset Management to discuss all aspects of a comprehensive financial plan, including taxation. We are the only fee-only, fiduciary CERTIFIED FINANCIAL PLANNER™ Professional located in Greeneville, TN.  

At Sapiat Asset Management, we use a personalized process to identify the unique financial and retirement planning strategies that meet the needs of our Generation-X clients. Our knowledge of your financial situation is a big part of the foundation that drives our relationship with you. Contact us today for a complimentary consultation.

Sapiat Asset Management is a Fee-Only, Independent, Registered Investment Advisor (RIA), specializing in goal-oriented financial planning and investment management for Gen X Individuals & Families, their Businesses, & the Trusts that benefit them and their heirs.