Early preparation for 2022 tax reporting can be beneficial, especially as any potential tax law changes occurring in 2022 could spark a planning opportunity. In this Insight, we will provide an overview of fourth-quarter tax planning considerations.
Getting Started
A great starting point in the tax planning process is examining the 2021 tax return and comparing that information to 2022 activity. If during 2022 a taxpayer experienced life changes such as new employment, marriage, divorce, or family growth, or made a significant asset purchase, there may be associated risks and opportunities that need further consideration or action. If a taxpayer owed taxes in 2021, he or she may want to consider steps to help mitigate unexpected liabilities – like penalties.
Penalties
Taxpayers frequently face penalties when they do not meet their tax obligations, like underpaying their estimated tax or not withholding enough federal income taxes on wages. Often the penalties are a result of failing to file the tax return on time or paying an incorrect amount. Other penalties include failure to pay, failure to file, and failure to provide accurate returns. Interest may be charged on penalties—the date the interest begins depends on the type of penalty. Penalties can be removed, reduced, or disputed.
Tax Withholdings and Estimated Payments
Adjustments to withholdings and estimated tax payments are a great way to avoid penalties. Withholdings are not limited to payroll—they can also apply on-payroll sources (e.g., interest, dividends, gambling winnings, etc.); upfront action may be needed to timely secure additional required withholdings. Taxpayers not subject to withholdings can make estimated tax payments. Most individuals will avoid penalties by paying at least 90% of the tax due or 100% of the prior-year tax liability.
Strategic Tax Planning
Accelerating and deferring income are approaches to consider during fourth-quarter tax planning. When choosing the best approach, taxpayers should evaluate the timing of income that may be deferred, and review current tax brackets and rates as part of their decision process. Often, strategies like tax-loss harvesting help reduce the risk of recognizing income in an unwanted tax period. Tax-loss harvesting allows taxpayers to use losses to offset gains from their investment activities.
Maximizing retirement savings is another area to explore during tax planning. Taxpayers can lower their Adjusted Gross Income (AGI) by contributing the maximum amount permitted to a 401(k) and benefit from the tax-saving move.
Many taxpayers make simple, avoidable mistakes, such as choosing incorrect filing status, filing too early, or misspelling names, when preparing their tax returns. It is important to double-check this information prior to filing and to be aware of changes from year to year—there may be new or expiring credits that affect planning. Other factors (international and state considerations, for example) may need to be addressed as well.
If you would like to speak with a tax professional about fourth-quarter planning or any matter involving tax planning and strategy, one of our PYA contacts would be happy to assist. You may email them below, or call (800) 270-9629.
