3 Tax moves that must be made by December 31

Dan Caplinger, The Motley Fool,

Thanksgiving is here, and before you know it, it’s time to start planning your New Year’s Eve parties. But in addition to holiday shopping, planning for family trips, and everything else that comes with the holiday season, it’s important to tackle your tax planning before the end of December.

In particular, there are a few things you absolutely must do by December 31st. If you don’t, you could miss out on valuable tax breaks or even face more unexpected surprises. Below, you’ll find three tax-related moves to make over the next several weeks.

1. Take any required minimum distribution from retirement accounts

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

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For most people, those people should be withdrawn from retirement accounts by December 31st.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

2. Harvest your tax losses

2022 has been a tough year for stock market investors, and many people have had positions where they lost money. with a purpose Claim a tax loss on those investmentsYou must sell your shares at the end of the calendar year. This will result in a loss of capital that you can use as tax benefits.

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

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

Finally, one great way to reduce your taxable income is to take advantage of tax-favorable retirement accounts. With IRAs, you have until mid-April of the following year to make contributions. but with 401(k)s And other employer-sponsored plans, there is no grace period until the beginning of 2023. If you want to increase contributions, you’ll have to get additional money by December 31st.

Working with the HR department will give you the best chance of smoothly increasing your contribution. Furthermore, if you would like a temporary raise but revert to previous practice when 2023 begins, you will definitely need to coordinate with your payroll staff to avoid any errors.

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 are any delays due to holidays, you won’t find yourself scrambling and possibly missing out. Taxes may not be the first thing on your mind heading into 2022, but taking the time to tax planning now will pay off in the new year.

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