3 taxes to be paid by December 31

Dan Caplinger, The Motley Fool,

Thanksgiving is here, and before you know it, it will be time to start planning a party for New Year’s Eve. But on top of holiday shopping, planning family trips, and everything else that comes with the holiday season, it’s important to get a handle on your tax planning before December ends.

In particular, there are some things that really need to be done by December 31. Otherwise, you could miss out on a valuable tax break or even face a more unexpected surprise. Below, you’ll find three tax-related moves to make in the next few weeks.

1. Take the required minimum distribution from the retirement account

People who are 72 or older should typically start taking money out of traditional IRAs, as well as from 401(k) or similar employer-sponsored retirement accounts. In addition, those who inherit IRAs and are eligible to take annual withdrawals that span across their projected life expectancy also have a minimum amount that they must withdraw each year. These withdrawals must be known minimum distribution required . Calculating the amount involves looking at your retirement account balance at the beginning of the year and applying a life expectancy factor to determine the fraction of the balance you should withdraw.

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For most people, these RMDs must be withdrawn from their retirement accounts by December 31st. There is a one-time exception for those age 72, as they can choose to stop taking their first RMD until April 1. next year. Miss your RMD, and the IRS can impose a massive 50% penalty on the RMD amount, so you don’t want to forget it.

2. Harvest your tax losses

2022 is a tough year for stock market investors, and many people have positions where they have lost money. So claim tax loss on their investment, you must sell your shares by the end of the calendar year. That will result in a capital loss that you can use as a tax benefit.

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

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-favored 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 at the beginning of 2023. If you want to increase your contributions, you must receive the extra money by December 31.

Working with your HR department will give you the best chance to increase your contribution smoothly. Moreover, if you want a temporary raise but return to the old practice when 2023 begins, you will definitely want to coordinate with your payroll person to avoid slip-ups.

Don’t wait

It is generally a good idea not to wait until the last minute to make these tax moves. That way, if there’s a delay due to the holidays, you won’t find yourself scrambling and possibly getting lost. Taxes may not be the first thing on your mind as 2022 comes to a close, but spending a little time on tax planning now will pay off in the new year.

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