by Chris Bixby, CFP®, EA
Senior Vice President
Portfolio and Wealth Management
Taxes … just the word alone increases blood pressure and elicits a fight-or-flight response. As such, most people outsource their tax preparation. Whether you manage your taxes or outsource the task, there is still a good amount of work we are all responsible for.
A successful tax filing largely depends on making the right decisions during the previous calendar year. With that in mind, the fourth quarter is an excellent time to make thoughtful decisions before the end of 2022. Below are a few things you may want to address before the busy holiday season arrives:
1. Consider All Income for the Year
2022 has been a unique year for the economy, which may mean you have unexpected changes to your income that could be positive or negative. To prepare for either scenario, having an accurate estimate of your total revenue for the year is essential. Sufficient preparation can entail running forecasts if you are self-employed, looking at your incoming rent payments if you own real estate or are planning for your required minimum distributions if you are retired and above age 72. You will also want to consider any gains and losses in your portfolio that may differ from the prior year’s tax returns.
2. Know Your Marginal Tax Bracket
Understanding which tax bracket you are likely to be in can allow you to utilize other strategies. For example, you might have had some unexpected income this year and unknowingly entered the tax bracket above your usual one. In this scenario, you can assess the impact of a more significant charitable contribution to a donor-advised fund or the use of a qualified charitable distribution from your IRA (if you are older than 70 1/2 years old). Contributing a larger charitable amount can help lower your taxable income.
You may also be in a position where your expected income is lower than normal. Are there capital gains in your portfolio you should realize while your taxes are in a lower bracket? For some, a Roth conversion can increase income and reduce future taxes. Be wary of the unintended consequence of lowering taxes today at the expense of paying higher taxes in the future, as you may end up paying more overall taxes with higher taxes in future years.
3. Check Your Estimated Tax Liability
An unexpected balance can be an unpleasant surprise, and to make matters worse, if the balance is large enough, the IRS can impose estimated tax penalties. Therefore, carefully reviewing your tax withholding and estimated tax payments for the year can help you to avoid potential surprises.
4. Coordinate With Your Financial Team
While this sounds complicated, working with your financial team can help simplify the process. Your wealth advisor can give you some ideas about the long-term impact of taxes; your tax professional can run some quick reports to identify your tax bracket exposure. Meanwhile, all of these can be used to identify any gains or losses to realize.
A little work in the fourth quarter can help you better prepare for your next tax-filing season. You will have a more enjoyable (or perhaps less stressful) time getting your documents together for your tax professional. Your financial team will also appreciate the ability to maximize your resources by being as efficient as possible with your tax returns.
We encourage you to reach out to your portfolio manager if you have any questions about planning for tax filing. Our team welcomes the opportunity to meet you and your tax professional for a coordinated effort on your best strategy for the year.
Ferguson Wellman, Octavia Group and West Bearing do not provide tax, legal, insurance or medical advice. This material has been prepared for general educational and informational purposes only and not as a substitute for qualified counsel. You should consult qualified professionals to understand how this information may, or may not, apply specifically to you.