Leverage the tax code to minimize your tax liabilities

As we head into March, one of the most dreaded times of the year is approaching: tax season. Right now you’re inundated with tax documents, including a W-2 from your employer, 1099s from your side gigs, 1099-MISC statements from your online brokers, 1099-Rs for retirement income and more. again.

There’s not much you can do now to reduce your tax liability in 2021 outside of contributing more to tax-deferred retirement accounts. That’s why the start of the year is the perfect time to adopt new strategies to minimize your tax obligations for 2022.

Too often you focus on the rear view mirror – what you’ve already done and what you’ll have to pay. Instead, when you focus on being proactive, you’ll reap the rewards throughout this year and into 2023 when you file your taxes for that year.

Inasmuch as registered agent – a professional who has earned the privilege of representing taxpayers before the Internal Revenue Service (IRS) – and a financial advisor, there are three strategies I will share with you that have the potential to lower your taxes in the years to come . Of course, every situation is different and you may have other factors that cause your taxes to increase even if you adopt these and other tax mitigation suggestions.

Strategy #1: Maximize your tax-deferred pension contributions

One of the most effective ways to reduce your tax liability is to increase your contributions to tax-deferred retirement vehicles, such as company-sponsored 401(k) or 403(b) accounts, Government-sponsored savings accounts (TSP) or individual accounts. retirement accounts (IRAs). If you’re like many people, you have the option of increasing your contributions before you reach the maximum allowable contribution.

If you are in a 401(k) or 403(b) account, this limit is $20,500 for 2022. If you have a SINGLE account, the limit is $14,000, while the limit for a SEP IRA is of $61,000. If you turn 50 in 2022 or are already over 50, you can save more with catch-up contributions, which are $6,500 for 401(k) and 403(b) and $3,000 for SIMPLE IRAs. There are no catch-up contributions allowed for SEP IRAs, as contributions can only be made by employers and not employees.

For traditional tax-deductible IRAs, which are accounts you create for yourself, contribution limits are $6,000 per year with an additional $1,000 allowed for catch-up contributions for those who turn 50 and more in 2022.

Strategically addressing your tax-deductible pension contributions for the entire year allows you to maximize your contributions while minimizing the impact on your budget. Here is an example shown in Figure 1: Suppose you want to increase your 401(k) contribution by 50%. If you can spread this out over 26 pay periods, those extra contributions will be spread over a longer period, which means each contribution will be smaller than if you decided to take this measure in the summer or fall, when you would have fewer weeks left in the year.

Figure 1: Impact of a 50% increase in 401(k) contribution at different times of the year

Initial contribution Additional contribution Total new contribution 26 pay periods 13 pay periods 7 pay periods
$5,000 $2,500 $7,500 $96.15 $192.31 $357.14
$7,500 $3,750 $11,250 $144.23 $288.46 $535.71
$10,000 $5,000 $15,000 $192.30 $384.62 $714.29
$12,500 $6,250 $18,750 $240.38 $480.77 $892.86

You can see how starting early in the year has a huge advantage. In this case, increasing your contribution by $2,500 per year would only result in additional payroll deductions of $96.15, assuming you are paid bi-weekly. Even if you wanted to increase your dues by $5,000, you would still be left with a manageable deduction of $192.30 per week. However, the longer you wait, the steeper the slope you will have to climb in terms of the amount to contribute per pay period.

The more you contribute, the greater your tax savings, since 401(k), traditional contributions to IRAs, SEPs, and SIMPLE IRAs are made with pre-tax dollars. Think of this strategy as a win-win strategy because not only are you saving money on your taxes today, but you’re also building a nest egg for tomorrow when it’s time for you to retire. Of course, you will have to pay taxes on your contributions when you withdraw money in retirement.

Strategy #2: Invest in stocks with qualified dividends versus ordinary dividends

Qualified dividends are taxed at more favorable capital gains tax rates, unlike ordinary or non-qualified dividends, which are taxed at ordinary tax rates. Capital gains tax rates are 0%, 10%, 15% or 20%, unlike rates on ordinary income, which can be as high as 37%.

Generally, if you hold dividend-paying stocks in taxable accounts — not retirement accounts — you will pay taxes at the qualified dividend rate, as long as you hold shares of the company issuing those dividends for more than 60 days during the 121-day period that begins before the day a company’s dividend is recorded, which is also known as the ex-dividend date.

While this definition may seem complicated, there is a method to the IRS madness – Congress’ intent was to reward long-term shareholders with a lower qualified dividend rate. This is why you must hold shares for a certain period of time to benefit from the preferential dividend rate.

The definition of an ordinary dividend, unlike a qualified dividend, is a dividend from certain types of stocks, such as real estate investment trusts (REITs) and master limited partnerships (MLPs). In practice, these stocks may have dividends taxed at lower effective rates, but many different factors play into this distinction and are beyond the scope of this article.

In addition, money market funds and dividends paid by employee stock option plans are also ordinary dividends. Luckily, you don’t have to do the math or know which are which, as these will automatically be categorized by type on your tax slip.

To circumvent these issues and minimize your tax liability, it may be a good idea to hold qualified dividends in taxable accounts and stocks and other instruments with ordinary dividends in tax-deferred accounts, such as qualified pension plans, or in non-taxable accounts, like Roth. IRA.

Strategy #3: Consider variable investment annuities only

Often overshadowed by other types of annuities, variable investment annuities only offer an option to save money on a tax-deferred basis beyond other tax-deferred vehicles, such as 401(k)s or traditional IRAs. Unlike many other types of variable annuities, which have a bad reputation for high fees and complexity, investment-only variable annuities are fairly simple, offer a wide variety of investment options, and have reasonable fees.

One advantage of investment-only variable annuities, especially over 401(k) funds, is the wide variety of investment options available. These can be used to diversify retirement assets, as many 401(k) plans offer limited options in a few asset classes. You can use a variable investment annuity only to invest in alternative investments or in asset classes that may not be offered under your company-sponsored pension plan.

Investment-only annuities are not for everyone. If you haven’t maxed out your company-sponsored retirement accounts, there isn’t much point in investing in this type of vehicle. However, if you’ve maxed out your company-sponsored retirement accounts and are looking for another place to store savings that you can use to get a tax deduction, it might be worth considering an annuity. investment only.

Like other types of annuities, investment-only annuities does not offer liquidity. In other words, if you are likely to need the money you saved before you turned 59 1/2, you should not invest in this type of annuity because you will have to pay a penalty of 10 % if you take the money out early.

Also, the wording of annuity contracts is quite complex and some of the provisions can be difficult to understand. Fees vary widely, so be sure to research all of your options before committing to any of these products.

Securities and advisory services offered through Registered Representatives of Cetera Advisor Networks LLC (carrying on insurance business in California as CFGAN Insurance Agency LLC), Member FINRA/SIPC, Broker/Dealer and Advisor in registered investment. Cetera is under separate ownership from any other named entity. Investment advisory services may also be offered through HBW Advisory Services LLC. LHD Insurance & Financial Services, HBW Insurance & Financial Services, Inc. dba HBW Partners and HBW Advisory Services LLC are separate entities, which do not provide legal or tax advice. CA Insurance License: 0C63007
This article is designed to provide accurate and authoritative information on the topics covered. It is not, however, intended to provide specific legal, tax or other professional advice. For specific professional assistance, the services of an appropriate professional should be sought.
Any investment involves risk, including the possible loss of principal. There can be no assurance that any investment strategy will be successful.
Branch: 13776 Paseo Cevera, San Diego, CA 92129

Director, LHD Insurance and Financial Services

Bulent Erol is the director of the company LHD Insurance & Financial Services and is a 30+ year veteran of the financial services industry. Prior to founding his own financial services company, Bulent held various field and management positions at Price Waterhouse, AXA and Merrill Lynch.He is a registered agent and holds the title of Chartered Federal Employee Benefits Consultant. He has completed the curriculum for the Certified Financial Planner designation.

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