Year-End Tax Planning Strategies

By Barbara O’Neill, Ph.D., CFP®

December is “crunch time” to complete actions for the current tax year (2022) to reduce income taxes and plan ahead for next year (2023). Military families, like all taxpayers, have a number of tax planning strategies at their disposal. Below are five tax topics that Personal Financial Managers may want to discuss with clients:

Itemized Deduction Planning- Only about 10% of taxpayers can itemize by aggregating tax-deductible items that exceed the standard deduction ($12,950 for single taxpayers and $25,900 for married filing jointly in 2022). With a $10,000 cap on deductions for state and local taxes, three key areas for itemization are mortgage interest, charitable donations, and unreimbursed medical expenses. Typically, this involves “bunching” deductions so itemization can occur in some years, but not all.
Tax Loss Harvesting– Capital gains on investments, whether short- or long-term, can be offset by capital losses, using an ordering method outlined by the IRS. It is best when long-term gains outweigh short-term gains because the latter is taxed at ordinary income tax rates (vs. 0%, 15%, or 20% long-term capital gains rates, depending on taxable income). Through tax-loss harvesting, investors sell securities with capital losses to offset sales of securities with capital gains. They must, however, wait 30 days to buy back the security.
Business Tax Planning- A self-employed military spouse can stop billing clients for work until 2023. This is a time-tested strategy for cash-based business owners who expect to earn less income next year. Another strategy is purchasing business-related assets before year-end. Be aware, however, that increased expenses reduce business income and, thus, the Qualified Business Income (QBI) deduction. Contributing to a Simplified Employee Pension (SEP) can also lower taxes.
Tax-Deferred Retirement Accounts– Traditional IRAs (subject to income caps) and Thrift Savings Plan (TSP) account provide a tax deduction for the year contributions are made and spousal IRAs are available for spouses with no earned income. In 2022, the maximum that can be contributed to TSP accounts is $20,500 for those under age 50 and $27,000 for those who are 50+. In 2023, these limits rise to $22,500 and $30,000, respectively. Contributions and earnings are taxed at ordinary income tax rates when withdrawn.
Roth IRAs and Roth Conversions– Roth IRA deposits made with after-tax dollars are not tax-deductible. Earnings grow tax-deferred and withdrawals, including contributions, are tax-free if the account is in place for 5+ years and the account owner is age 59.5 or older. Service members with traditional IRAs can start funding Roth IRAs and/or make Roth conversions to build a “bucket” of tax-free assets for use in later life. Taxes are due on converted amounts at the time a tax return for that year is filed.