No one wants to get stuck with a large tax bill in April. This is especially true for high-income individuals, as they are generally subject to much higher tax rates than most people. Luckily, there are many tax strategies and planning opportunities available to help reduce potential tax liabilities if you are a high-income earner.
At Casey Moss Tax and Accounting, we specialize in helping people reduce their tax bills by taking advantage of tax planning opportunities throughout the year. We can run a tax projection for you to see where things stand. After that, we can present you with opportunities available to save taxes this year. If you are interested in hearing about how we can save you money, send us a message to get started!
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Maximize All Traditional and Roth Retirement Options
When we say traditional retirement options, we are generally referring to tax-deferred 401(k) plans, IRA’s, SEP IRA’s, and SIMPLE IRA’s. These plans allow you to contribute funds into an account for retirement and take a tax deduction in the current year. For example, if you make $100,000 in taxable income in the current year and decide to contribute $10,000 of those wages to your employer’s 401(k) plan, your W-2 will only show $90,000 of taxable income. The general belief in traditional retirement accounts is that you’ll be in a higher tax bracket now than you will be during your retirement. Therefore, it may make more sense to take the deduction now while you are in a 32% bracket vs. in retirement when you may be in a 22% bracket. The disadvantage to traditional retirement options is that you will have to pay tax on your contributions plus the gains during retirement when you pull the money out.
On the other hand, Roth options do not provide any tax savings in the current tax year. Contributions to Roth accounts are made with after-tax dollars, meaning you are not saving any money in taxes during the current year. However, these accounts can grow tax-deferred the same way that traditional accounts do, but you will not have to pay taxes on the investment gains or the contributions made when you withdraw them during retirement. This is an attractive option for anyone that believes they will be in a similar or higher tax bracket during retirement.
401(k) Plans
For 2022, the maximum employee deferral to 401(k) is $20,500. If you are over age 50, you can contribute an additional $6,500 per year in catch-up contributions, meaning you can defer a total of $27,000 to your work retirement plan. This is true for both traditional 401(k) and Roth 401(k) options. This does not include any employer matching contributions allowed. If you are self-employed and have a solo 401(k), you can contribute an additional 25% of your earnings subject to FICA taxes, with a total combined cap of $61,000 between employee and employer contributions.
SIMPLE IRA’s
The maximum employee contribution to a SIMPLE IRA is $14,000 in 2022, If you are over age 50, you can contribute an extra $3,000 in catch-up contributions. This does not include matching contributions that your employer may make, which are generally 2-3% of your gross wages.
SEP IRA’s
If you are self-employed and have a SEP IRA, the maximum contribution is 25% of your net earnings from self-employment, with a maximum contribution of $61,000. Net earnings from self-employment can generally be found on your schedule C each year. This is a calculation that is done during the tax preparation process. If you are an S-corporation, the maximum contribution is calculated based on the total wages paid to the owner. If you have other plan participants, you are generally required to make contributions to their accounts in an equal percentage as the contributions made to your account. If you are taxed as a partnership and file form 1065, you can make contributions based on your net earnings subject to self-employment taxes.
Traditional and Roth IRA’s
If you do not have an employer plan or want to supplement your employer plan, you can also contribute to a Roth IRA or a traditional IRA. However, there are income limits associated with these depending on your situation. For Roth IRA’s, your ability to make contributions begins phasing out at $129,000 in MAGI, and is completely phased out at $144,000 for single people in 2022. For married individuals, the range is $204,000 – $214,000. Consider these phaseouts carefully prior to making Roth IRA contributions.
For traditional IRA contributions, there are no income limits if you and your spouse (if applicable) do not have a work retirement plan. If you are single and have a work retirement plan, your traditional IRA contributions will be fully deductible if your MAGI is below $68,000. Once your income reaches $78,000, none of your traditional IRA contributions will be deductible. They will still be allowed, but you cannot take a current year tax deduction for the contributions. If you are married and one spouse is covered under a retirement plan, the income phaseout for deductibility of contributions is $204,000-$214,000. If both spouses are covered under a work plan, the phaseout is $109,000 – $129,000.
The maximum contribution to a Roth IRA or traditional IRA for 2022 is $6,000. If you are over 50, you can contribute an additional $1,000 in catch-up contributions.
Consider Making HSA contributions
HSA stands for health savings account. Health savings accounts are available to all individuals that have a high deductible health plan. For 2022, the definition of a high-deductible health plan is a plan having a minimum deductible of $1,400 (or $2,800 for family medical plans), and having a maximum out of pocket amount of $7,050 ($14,100 for family plans). Many employer plans these days will qualify as a high deductible health plan. If your employer offers an HSA as a supplemental benefit, you should take full advantage of it through payroll deductions. If they do not, you can open an HSA at a bank or other financial institution.
In 2022, the maximum contribution to an HSA is $3,650 for individual health plans and $7,300 for family health plans. If you are over the age of 55, you can add an additional $1,000 to those amounts in catch-up contributions.
By making HSA contributions in the current year, you’ll reduce your taxable income by the amount that you contribute. If you do this through payroll deductions via your employer, your taxable wages on your W-2 should be reduced by the amount of payroll deductions made. If you are contributing as an individual outside of your employer, you need to make sure you deduct these contributions on form 8889.
Practice Tax-Loss Harvesting in your Investment Portfolios
If you have taxable investment accounts outside of your retirement plans, consider harvesting any unrealized losses in your portfolio to offset any tax gains realized in the current tax year. For example, if you have $20,000 in realized investment gains from sales of stock during the tax year and are currently holding a position that has an unrealized loss of $20,000, you could potentially offset your entire tax liability from the realized gains by disposing of the losing position. Prior to making any decisions like this, be sure to contact your financial advisor.
One important thing to keep in mind when harvesting losses is that there are limits to the amount of capital losses you can deduct on your tax return. In 2022, you may only deduct up to $3,000 of capital losses that are in excess of your capital gains. For example, if you have $20,000 in recognized gains from sales of stock and decide to recognize a $25,000 loss from a losing position, your total losses will be $5,000 for the year. However, on your tax return, you can only deduct $3,000 in net capital losses, meaning that $2,000 will be carried forward to a future year to offset future capital gains.
2022 Tax Laws to Be Aware of For High Networth Individuals
Since tax laws are constantly changing, it’s critical to have a tax expert that follows law changes and informs you of any planning opportunities. Our team stays on top of law changes and can guide you through your decision making. Here are a few examples of 2022 law changes that may impact your tax return.
- SECURE Act: This completely changed many attributes to retirement accounts, estate planning, required minimum distributions, and the taxability of retirement withdrawals in years ending after 2020.
- Inflation Reduction Act: There are major changes to energy tax credits and corporate tax laws that may significantly impact your tax returns.
- Adjustments for Inflation: Each year, the IRS updates the maximum retirement contributions, the standard deduction, and many other tax items for inflation. With inflation being so high in 2022, many of these figures increased more than prior years. Taking full advantage of any retirement savings opportunities is critical to planning.
Looking For Personalized Tax Help?
Our firm can guide you through this complicated landscape of savings opportunities. We can complete tax projections and present you with different scenarios based on the decisions you make so you can see the true impact of these planning opportunities. Get your free individual tax quote today!
