3 tax measures to take by December 31

3 tax measures to take by December 31

Dan Caplinger, The Motley Fool,

Thanksgiving is here, and before you know it, it’ll be time to start planning New Year’s Eve parties. But besides holiday shopping, planning family trips, and all that accompanies the holiday season, it is important to get your tax planning under control before the end of December.

In particular, there are some things that absolutely must be done by December 31. If you don’t, you could miss out on valuable tax relief or even face even more unexpected surprises. Below, you will find three tax measures to be carried out over the next few weeks.

1. Take any required minimum distributions from retirement accounts

Those who are 72 or older generally need to start withdrawing money from traditional IRAs, as well as 401(k) or similar employer-sponsored retirement accounts. Additionally, those who inherit IRAs and are eligible to make annual withdrawals that span their projected life expectancy also have minimum amounts they must withdraw each year. These mandatory withdrawals are known as required minimum distributions. Calculating the amount involves looking at the balance in your retirement accounts at the start of the year and applying a life expectancy factor to determine how much of the balance you need to withdraw.

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For most people, these RMDs must be withdrawn from their retirement accounts by December 31. There is a one-time exemption for those who turn 72 during the year, as they can choose to defer taking their first RMD until April 1 of the following year. If you miss your RMD, the IRS can impose a massive penalty of 50% of the RMD amount, so you won’t want to forget that.

2. Collect your tax losses

2022 has been a tough year for stock market investors, and many people have positions they lost money on. In order to claim a tax loss on these investments, you must sell your shares before the end of the calendar year. This will generate a capital loss that you can use as a tax benefit.

You can use capital losses to offset an unlimited amount of capital gains in the same year. Plus, if you have capital losses left, you can use up to $3,000 a year against other types of income, including interest and dividends, wages and salaries, and taxable withdrawals from the plan. of retirement. If you still have more losses, you can carry forward any amounts over $3,000 for use in future tax years.

3. Increase contributions to 401(k) plans or other employer-sponsored plans

Finally, a great way to reduce your taxable income is to take advantage of tax-efficient retirement accounts. With IRAs, you have until mid-April of the following year to make contributions. But with 401(k) and other employer-sponsored plans, there’s no grace period until early 2023. If you want to increase contributions, you’ll need to get the extra money from here on December 31.

Working with your HR department will give you the best chance to boost your contribution smoothly. Also, if you want to make a temporary increase but revert to pre-practices in early 2023, you’ll definitely want to coordinate with your payroll employees to avoid any slippage.

do not wait

It’s generally a good idea not to wait until the last minute to make these tax changes. That way, if there’s a delay because of the holidays, you won’t find yourself scrambling and possibly missing something. Taxes might not be the first thing on your mind at the end of 2022, but spending some time on tax planning now will pay off in the new year.

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