October 2022 Newsletter

The start of the 4th quarter means that Fall is here. 

Fall is my favorite time of year. The weather starts to cool off, the leaves begin to change, and football is back. 

The 4th quarter also means we’re getting close to the end of the year. For our firm, we take this time to help our clients prepare for what their tax situation will look like when they file next year. 

We know we can’t help everyone so we wanted to give you a little sneak peek into what that looks like in hopes that you can take something away from this that you can implement to help your family. 

Where to Start

The first place to start is understanding where your income is coming from this year and how it’s going to be taxed. 

• How are you compensated and how is that taxed?
• Is your pay structure straightforward or more complex?
  • Some W-2 and some 1099?
  •  If you get bonuses or commissions on top of your salary, are they taxed the same way?
• Do you have additional income from other sources?
  • Any real estate income?
  • Interest or dividend income?
  • Do you have any capital gains from any of your investments?
  • Social security income (how much of it will be taxed?)
  • Distributions from retirement accounts?
  • Did you receive any alimony payments?
  • Did you receive any unemployment income?
  • Income from a trust?

As you can see, there are many different ways to earn income. If you’ve ever reviewed a tax return, you know that the IRS knows them all and many of them are taxed differently. 

This exercise may take two minutes for some people who are solely W-2 and have no additional income. For others, this could take a little longer. 

Once you’ve figured out all the places you will earn income, then you need to understand how that income will be taxed. 

If you’re a W-2 employee with no other income, this is pretty straightforward. 

If you’re self-employed, you’ve got income from another source, or just have some complexity to your situation this will look a little different.

You may have some ordinary income, some passive income, and some capital gains income. All three of which are taxed differently. 

How Much?

Once you’ve taken the time to figure out all the places you’re receiving income, the next step is to figure out how much income you will earn from each of those places. 

If you’re a W-2 employee, that will be pretty easy to project. If your income fluctuates based on earning commissions or deals closing, this will be harder. What we like to do is sit with our clients and help them project as best they can based on what they know now. 

For interest and dividends, this is pretty easy to look up and project out for the rest of the year. The same can be said for social security and distributions from retirement accounts (especially if they are regular).

As mentioned above, some of this will require some projecting through the end of the year. We understand going into this process the numbers won’t be exact, but it’s still useful to project. 

You can be as conservative or aggressive with the projections as you’d like. You can also do both to give yourself a range of where you might land.

What’s Next

After you’ve got a pretty good grip on how much income you will be reporting for the current year and a general understanding of how that income will be taxed, the next step is to figure out what options you have to reduce that number. 

Do you have access to a 401(k) or another group-sponsored retirement plan? If you’re not maxing it out ($20,500 if you’re under 50 or $27,000 if you’re 50 or older in 2022), does your current cash flow allow you to increase your contributions?

Do you have an HSA that you’ve been contributing to, or can contribute to? If so, can you increase contributions to max it out? In 2022, for individuals under 55, that amount is $3,650. For families under 55, that amount is $7,300. For those 55 and older, there is a $1,000 catch-up. 

You have until you file your taxes next year to make this contribution. For a reminder of the benefits of HSAs go check out our write-up in a newsletter from last year.  

Do you plan on making a charitable donation this year? Maybe you had a bigger commission year or larger than expected bonus this year and it’s pushed you into another tax bracket. It might make sense to lump your gifting for the next few years into this year’s gift. 

For more information on this refer to our post about charitable giving, specifically the section on Donor Advised Funds. 

Another thing you can consider is making contributions to a traditional IRA. This is also something you have until you file your taxes next year to do. Be sure to confirm that you are eligible to deduct your contributions. There are rules on what can be deducted based on access to an employer plan and income levels. 

Other Things To Consider

If you’re on Medicare or approaching using Medicare, you should be aware of how your income will impact your monthly premiums. There is a base monthly premium for part B, but if your income is above a certain threshold, you will pay more than the standard amount. 

Note, they look at income from two years ago. So if you’re turning 65 in two years, this year is the year they will use to determine what your premium will be. The premium amount is re-evaluated each year and based on income from two years prior. 

Have you hit your deductible for this year? If so, is there a procedure or something medical that you need to get done, but haven’t? It might be a good idea to do that before the year ends. 

Does your company offer an FSA (flexible spending account)? If so and you haven’t used all the funds, you might want to consider finding a way to use them. 

Unlike an HSA, FSA funds typically don’t roll over and you lose them if they aren’t used though there are some ways you can roll over a portion of the funds. 

The end of the year is also a good time to make sure you understand your benefits through work if you just finished going through open enrollment. 

Final Thoughts

If you’ve been doing things on your own and this isn’t part of your process, I’d recommend adding it. If you feel like it’s too much, but don’t want a long-term relationship with an advisor or planner, find someone who bills hourly or will charge you a one-time fee that can help you with this specifically. 

Lastly, if you’re paying a financial advisor and you’re not having these conversations, we’d encourage you to find someone who will. We’d love the opportunity to serve you if the fit is right. 

If you’d like to schedule a free call, click here.

Monthly Minute

Be on the lookout this quarter for more helpful information on end of year planning in our upcoming Monthly Minute releases.

Get to Know Our Team

This past quarter was full of fun for our team.

Lee and his family went to the beach over the 4th of July as well as during Fall break.