3 tax moves to make by Dec. 31

Dan Caplinger, Colorful Fool,

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

There are a few things that must be done, especially by December 31st. Otherwise, you could miss out on valuable tax breaks and even more unexpected surprises. Below you’ll find three tax-related moves over the next few weeks.

1. Make the required minimum distribution from retirement accounts

Those 72 and older should typically start receiving money from traditional IRAs, as well as 401(k) or similar employer-sponsored retirement accounts. Additionally, those who inherit IRAs and have annual withdrawals that extend over their projected lifespan also have minimum amounts they must withdraw each year. These mandatory withdrawals are known as required minimum distributions. Calculating the amount involves looking at the balance of 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 removed from their retirement accounts by December 31. There is a one-time exemption for those who turn 72 during the year because they will be able to delay receiving their first RMD until April 1. the following year. If you miss your RMD, the IRS can impose a massive 50% penalty on the RMD amount, so you won’t want to forget it.

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2. Collect your tax losses

2022 has been a tough year for stock market investors, and many have lost money positions. To claim tax loss on these investments, you must sell your shares by the end of the calendar year. This will create 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. Additionally, if you have any remaining capital losses, you can use up to $3,000 per year against other types of income, including interest and dividends, wages and annuities, and taxable retirement plan withdrawals. If you have more losses remaining, you can roll over any amount above $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 next year to contribute. However, for 401(k)s and other employer-sponsored plans, there is no grace period until early 2023. If you want to increase your contributions, you must receive the extra money by December 31st.

Working with your HR department will give you the best chance to seamlessly increase your contribution. Also, if you want to make a temporary increase but go back to the old practice when 2023 starts, you will definitely want to coordinate with your payroll workers to avoid any mistakes.

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It’s usually a good idea not to wait until the last minute to make these tax moves. That way, if there are any delays due to the holidays, you won’t find yourself struggling and possibly missing out. Taxes may not be the first thing on your mind as 2022 comes to an end, but taking some time off for tax planning now will pay off in the new year.

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