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Welcome. We at Compass Planning continue to appreciate your support. Thank you.
We're now in the middle of the 2022 tax season. You should have received all the documentation from your various financial, federal, and state institutions. This issue will give you ideas that we hope go beyond the basic income and expenses information, including how you can make your 2023 tax year better. Take a look to see if you can tweak what you're doing.
If you missed our series on retirement, you can still access the issues. For Retirement, Part 1 - Retirement Savings, click here. For Retirement, Part 2 - Social Security, click here. For Retirement, Part 3 - The Retirement Paycheck, click here.
Whether you're retired, about to retire, or still working, we have some ideas. If you would like assistance with your income tax planning, we are here to help you stay On Course!
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Smart Tax Tips for Now and Next Year
Upgraded IRS.gov website
- The IRS has made their website much more usable. You can pay taxes, check on your refund, and, if you’re eligible, free file at www.irs.gov.
- You can pay your state taxes online, too. A Google search for your state should get you there. Be sure the site has the “.gov” suffix and “https” in the URL address.
Estimated taxes and safe harbor
- If you owed taxes this year or if you expect a bigger bill next year and are making estimated tax payments, save time by increasing your tax withholding on your paycheck, Social Security, pension, or required minimum distribution (RMD) instead of making quarterly estimated payments.
- Of course, if you’d rather make the estimated payments, make them more securely online at https://www.irs.gov instead of mailing a check.
- Your tax software or your tax preparer recommends estimated taxes in order to reduce the chance of owing for an under-withholding penalty. If your income varies from year-to-year, it’s worth becoming familiar with the safe harbor rule.
- A post from H&R Block® spells it out pretty well. Click here to read it.
- If you know you’ll owe taxes next year and you’re withholding enough to meet the safe harbor amount, earn the interest yourself by keeping your money in savings until the tax bill comes next year.
Charitable giving
- The current high standard deduction (and cap on deducting state, property, and local taxes) is keeping many from being able to itemize their deductions, limiting the tax benefit of charitable gifts.
- If you’re over age 70 ½, you can write a check from your IRA account and mail to the charity or have a check mailed directly to the charity. The withdrawal doesn’t count towards your adjusted gross income (AGI) so it’s not taxable and doesn’t add income that can be counted towards your AGI for Medicare IRMAA (Income-Related Monthly Adjusted Amount).
- If you're under age 70 ½ and filing a standard deduction, consider using a donor-advised fund (DAF) to boost the tax benefit of your charitable gifts.
- A transfer to a DAF is a permanent transfer to a charity, so it’s deductible as a charitable gift.
- Transferring appreciated securities in-kind to the DAF counts not only as a charitable contribution but also lets you avoid realizing capital gain income on selling the security.
- We most often see accounts at Schwab Charitable or Fidelity Charitable, and we’ve recently started seeing accounts at Charityvest.
- Of course, DAFs have rules, and the IRS has fine print and limitations. This article from Nerdwallet does a nice job of explaining the details.
Losses
- It's been a long time since we've had losses in our individual positions. It's a good thing to harvest tax losses.
- You can sell a fund that has a loss and replace it with something substantially different.
- This works best with bond funds. You can sell a bond mutual fund, take the tax loss, then replace it with a treasury bond, maturing in a year. That way you have a loss on your taxes that will carry forward to count against capital gains, providing a savings on taxes.
Owing taxes
- If you owe taxes and it's an ongoing issue -- not a one-time event -- you'll want to adjust your paycheck withholding or your RMD withholding going forward.
- Reminder to check withholding when you experience life changes as well, e.g., marriage, children, divorce, and death.
- Remember that we're part-way through the year so make adjustments that will work for the rest of 2023 and then readjust in January 2024.
- If you feel you could gather the funds for the taxes between now and October, you could file an extension, pay what you can now, and pay the rest in October. The IRS will charge a penalty and interest.
- If you don't have the funds, look for a reasonable way to borrow the funds rather than owing the IRS because its penalties and interest add up fast.
Large refunds
- If you're lucky enough to get a big refund, file ASAP. With the amount of identity theft around, someone could file with your info ahead of you and take your refund. It can take eight to nine months to get it back!
- With the high interest rates and for future tax years, you could do a split direct deposit with your expense amount going into the checking account and the extra going into a savings account. You keep your extra withholding and make some extra money! If you go this route, remember to adjust your withholding.
- You can also buy an I Bond with your tax refund in $50 increments up to $5,000. Note that these will be paper I Bonds, strangely enough!
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The laws change every year; be sure to check the IRS website for updates. You're responsible for the information on the tax return you sign. Read it and ask questions if you don't understand something.
Get more tips in Jennifer's book
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