Act Before the End of the Year to Save Money on Taxes
17th Nov 2022
- Receiving deferred compensation in installments over several years can lower your tax bill.
- The 401(k) contribution limit in 2022 is $20,500 and the deadline to contribute is Dec. 31.
- High-contribution plans such as Defined Benefit and Cash Balance plans can provide for the largest annual contributions to retirement plans, often exceeding $100,000.
With rising interest rates, inflation and market volatility, tax planning is more important than ever. As the end of the year approaches, now is the time for entrepreneurs and small business owners to consider moves that will lower their 2022 tax bill and position themselves for tax savings in the future.
Here are four strategies that you may want to act on before December 31st to reduce your 2022 taxes.
- Defer Excess Income
You may want to consider deferring income and accelerating tax deductions, if you don’t expect your taxable income to decline in 2023. Income tax on deferred compensation typically is paid when you receive the deferred payment, rather than when you earn it. Receiving deferred compensation in installments over several years can lower your tax bill because the smaller installment payments are taxed at a lower rate than a bigger payment.
- Carryover Tax Deductions
A tax loss carryforward is a provision in tax law that allows a taxpayer to apply some unused deductions, credits, or losses to a future tax year. There are some years that certain tax deductions or credits may not be used. If these tax deductions can’t be used in a specific year, they can be applied to a future year. Some examples of tax deductions that can be carried forward include home office, charitable contributions, net operating losses, business credits and capital losses.
- Maximize Your 401(k) Contribution
For entrepreneurs and self-employed individuals who don’t have an employee-sponsored retirement plan, a 401(k) plan is a good retirement option. The 401(k) contribution limit in 2022 is $20,500 and the deadline to contribute to 401(k) retirement account is December 31st. People 50 years old or older can contribute an additional $6,500, for a total of $27,000. In 2023, the IRS will raise contribution limits to $22, 500 for 401(k)s and $6,500 for IRAs.
- Open a Defined Benefit or Cash Balance Plan
While a 401(k) plan is an important retirement solution for many small business owners, a Defined Benefit or Cash Balance plan may be ideal for small business owners earning high income. Unlike other self-employed retirement plans, these qualified retirement plans provide for the largest annual contributions to retirement plans, often exceeding $100,000. Although the deadline to open these pension plans is based on the business’ tax filing deadline, there may be benefits to opening these plans before year end. See how much you can save in 2022 taxes with our online calculator.