3 tax moves to be made by December 31st

Dan Caplinger, The Motley Fool,

Thanksgiving is here, and before you know it, it’s time to start planning New Year’s Eve parties. But beyond the holiday shopping, planning family trips, and all that comes with the holiday season, it’s important to get your tax planning done before the end of December.

In particular, there are some things that absolutely must be done by December 31st. Otherwise, you could miss out on valuable tax breaks or even face even more unexpected surprises. Below, you’ll find three tax-related moves to make in the coming weeks.

1. Take any required minimum distributions from retirement accounts

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

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For most people, these RMDs need to be withdrawn from their retirement accounts by December 31st. There is a one-time exemption for those who turn 72 during the year, as they can choose to defer drawing their first RMD until April 1 of the following year. You lose your RMD and the IRS can impose a massive penalty of 50% of the RMD amount, so you don’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 have lost money on. To claim a tax loss on such investments, you must sell your shares by the end of the calendar year. This will generate a capital loss that you can use as a tax advantage.

You can use capital losses to offset an unlimited amount of capital gains in the same year. Plus, if you still have capital losses, 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 your retirement plan. If you have even more losses left, you can carry over any amount over $3,000 to use in future tax years.

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

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

Working with your HR department will give you the best chance of increasing your contribution without any problems. Also, if you want to make a temporary raise but go back to past practice when 2023 rolls around, you’ll definitely want to coordinate with your payroll folks to avoid mistakes.

Do not wait

It’s generally a good idea not to wait until the last minute to make these tax moves. This way, if there is any delay due to the holidays, you won’t find yourself scrambling and maybe missing something. Taxes may not be the first thing on your mind as 2022 draws to a close, but spending some time on tax planning now will pay off in the new year.

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