Year-End Changes To Lower Your Liability

Key takeaways

• Tax season lies just around the corner, which means it’s time to seek those last-minute tax breaks
• While tax rates haven’t changed, each tax bracket (income range) has adjusted to account for inflation
• For investors on the edge, last-minute credits, deductions and losses might just bump you into a lower tax bracket

Well folks, we made it – December, 2022 is finally here. It’s the time of holiday wishes, wintry weather…and making year-end tax preparations.

Okay, so, readying your finances for tax season is a lot less fun than the other two. But for investors, it’s a final opportunity to lower your liability to Uncle Sam.

To help you prepare, we’ve outlined the federal income and capital gains tax brackets for 2022. We’ve also prepared a few tips to help you capture some last-minute tax breaks.

The 2022 federal income tax brackets

Each year, the IRS releases adjusted income tax brackets so taxpayers know what to expect come April 15. Below, we’ve outlined four tables that show your expected tax obligation based on your income and filing status.

Bear in mind that the IRS uses progressive taxes, which means as your income rises, so does your tax bill. But it doesn’t all rise evenly.

For example, if you’re a single filer earning $90,000, your top tax rate is 24%. But as you can see in the chart above, you’ll actually pay four different tax rates:

• 10% on the amount under $10,2765
• 12% on the amount between $10,275 and $41,775
• 22% on the amount between $41,775 and $89,075
• And 24% on the amount between $89,076 and $90,000

That makes a big difference in your tax bill. Instead of paying $21,600 – 24% of your entire income – your tax bill will be closer to $15,435. (And that’s before accounting for the standard deduction or eligible tax credits.)

The 2022 capital gains tax brackets

Investors also have to consider the impact of capital gains taxes on their annual bill.

Capital gains taxes are charged only to “realized” assets, or those sold for a profit. In other words, if your portfolio is up, you don’t have to pay taxes until you sell. (Though there are a few exceptions, like dividend payments.)

There are two kinds 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’ve held for at least one year. They’re generally taxed more favorably than short-term gains at 0%, 15% or 20%, depending on your income.

*Note that some high-earning taxpayers will pay an additional 3.8% tax on their investments.

Short-term capital gains tax rates

By contrast, short-term capital gains are taxed on assets you’ve held for under one year. Unfortunately, short-term capital gains typically incur larger tax bills, as they’re taxed at your ordinary income rate between 10% and 37%. (You can use the federal income tax brackets above to figure your short-term capital gains tax rates.)

Want to bump down to a lower tax bracket?

If your tax bill is too high (and let’s face it, we all think it is) investors can make some last-minute moves to aim for a lower tax bracket.

Your success depends on two basic factors:

• The income reductions and deductions you qualify for
• How close you are to the bottom edge of your tax bracket already

Note that you need to make these moves before December 31, 2022 to enjoy these breaks in the current year. So if you haven’t gotten a head start, it’s time to get cracking.

Pay next year’s tax-deductible bills now

In some cases, you might be able to lower your tax bill by taking next year’s deductions now. For instance, you might accelerate your deductions by:

• Paying January’s estimated state income or property tax bill now
• Pay extra toward any eligible medical bills that could reduce your tax burden
• Note: You can only deduct unreimbursed medical bills that exceed 7.5% of your adjusted gross income
• Make extra charitable contributions (up to the annual limit)
• Note: You must keep receipts for all charitable contributions to count them on your taxes
• If you’re of age and required to take minimum distributions (RMDs) from your retirement accounts, you can donate these payouts to charity, too
• Prepay tuition to enjoy an un-itemized tax break or claim the American Opportunity Tax Credit or Lifetime Learning Credit

Bunch your itemized deductions

When it comes to tax deductions, taxpayers have two options:

• Take the standard deduction of $12,950 for single filers or $25,900 for joint filers
• Or itemize your expenses if your deductions exceed the standard deduction

If you’re right on the edge of itemization, you might lower this year’s tax bill through bunching deductibles. Essentially, bunching involves cramming as many deductible expenses as you can into one year. Then, next year, you can lower your deductible expenses and claim the full standard deduction, regardless of your annual expenses.

By bunching one year and lowering expenses the next, you can reduce your long-term tax obligation and keep more income.

Try Not to Trigger the Alternative Minimum Tax

The Alternative Minimum Tax (AMT) is designed to ensure that wealthier taxpayers can’t deduct their entire tax bill away. The AMT is figured parallel to your regular tax bill, and you pay whichever is higher if you qualify.

But not everyone does. Generally, you’ll trigger the AMT if your income sits above the exemption amount for 2022 ($75,900 for single filers, $114,600 for joint filers) and you utilize many common itemizable deductions. Depending on where your income falls, you may pay an AMT tax rate of 26% or 28%.

The AMT is particularly tricky because it includes income streams that don’t usually qualify under normal income tax rules. At the same time, it removes the standard deduction, as well as many normally-itemizable deductions.

If you find yourself hit with the AMT, you might avoid prepaying bills or bunching deductions – you won’t get credit for them anyway.

Harvest your tax losses

Tax-loss harvesting is a key maneuver for many investors come December. Essentially, this strategy involves selling investments at a loss to offset any taxable gains.

Since losses offset your investment gains dollar-for-dollar, they provide powerful tax bill-reducing potential. Plus, if your losses exceed your gains, you can write off up to $3,000 in other income to lower your bill further. If it’s been a particularly bad year, you can even carry these losses into future years.

However, beware the “wash-sale” rule. Wash-sale rules require you to wait 30 days before reinvesting or buying a “substantially identical” investment to claim your losses.

Additionally, you can’t use tax-loss harvesting in tax-advantaged accounts, including traditional or Roth 401(k)s or IRAs.

Maximize your retirement contributions

Speaking of retirement.

One great way to lower your tax bill while preparing for the future is to contribute the maximum to your tax-advantaged accounts.

Not only can you lower this year’s tax bill on contributions to traditional retirement accounts, but you’ll enjoy tax-free growth until retirement.

Alternatively, you can pay taxes on your retirement contributions now and enjoy tax-free withdrawals when it’s time to leave the workforce.

Your maximum contributions may depend on either or both the type of plan you use as well as your income.

For 2022, your maximum 401(k) contribution is $20,500 for those under 50 or $27,000 for those over 50.

Traditional and Roth IRAs top their contributions at $6,000 annually, or $7,000 if you’re over 50. However, if your income is over $144,000 ($214,000 for joint filers), you may be ineligible to contribute to a Roth IRA.

Make sure your withholdings add up

One of the most important steps you can take to lower your tax bill – and related penalties – is, ironically, ensuring you paid enough in.

Whether you’re a W-2 employee or a 1099 freelancer, you’re required to make tax payments through the year. In some cases, if you fall short of your annual payment requirement, the IRS will charge a penalty.

To make sure you’re keeping up, you can use the IRS’s Tax Withholding Estimator to determine if you need to update your withholdings or quarterly tax payments. If you have to choose between overpaying and receiving a tax return and underpaying and owing a penalty, the tax return sounds a lot nicer.

Watch out for your tax documents from Q.ai

No one likes to pay the piper (in this case, Uncle Sam). If you’re looking for legal ways to bump down a tax bracket, these tips might help.

As tax season approaches, you also don’t want to forget the role that your Q.ai investments play in your financial picture.

Each year, Q.ai posts your 1099 tax documents in your account so you can see what you owe – and what you can write off. (Note that you’ll only receive a 1099 if you began trading in the last calendar year. You may also receive a 1099-DIV if you received any dividends.)

These tax documents will appear in your account by mid-February. You can access them by:

• Tapping Account Settings in the upper-left corner of your dashboard
• Tapping Tax Documents
• Saving any document directly from your app to your phone, or share it with any need-to-know contacts in your phone or email list

Watch out for the alert in your email and online portal – and happy hunting (for tax breaks).

Download Q.ai today for access to AI-powered investment strategies.