9 Year-End Tax Planning Tips Every High Earner Needs To Know

It’s that time of year again, and we’re not talking about the holidays and family dinners. It’s time to start tax planning.

 

Sure, the other stuff might be more exciting, but you can save money with effective tax planning, which is a cause for celebration in our book! And if you’re a high earner, it’s especially important to ensure your accounts, cash, and other assets are in order before you file 2022 taxes to keep your bill at bay. 

 

Most strategic opportunities for the tax year end on December 31. With that in mind, here are some tax planning ideas for high earners to consider before year-end.

1. Lower Your Taxable Income by Maxing Out Contributions to Qualified Retirement Plans. 

Most retirement accounts (401k, IRA, 403b, or 457) have annual contribution limits. Maxing out those vehicles will lower your taxable income, boost the account’s value, and help reduce your April tax bill.

 

RETIREMENT PLANS
(Annual Contribution Limits)

2022

401(k)
+ 403(b), most 457 plans, TSP (govt employee plan)

$20,500

    50+ Catch-up Contribution 

$6,500

IRA* (Roth** and traditional)

$6,000

    50+ Catch-up Contribution

$1,000

 

 *IRA contributions are deductible in full, unless you or your spouse are covered by another retirement plan at work and your income exceeds certain levels. If so, your deduction may be limited. See these charts for more info.
**Roth IRA contributions aren’t tax deductible

 

Aside from the tax benefits, it’s often beneficial to max out your plan’s contribution limits if possible, especially if you’re at least 50 (when you’re eligible for catch-up contributions) or planning on retiring early. 

 

But what if you’re already maxing out your employer contributions? There are still some unique tax moves to keep on your radar. 

Explore After-Tax Contributions 

Check if your 401k plan permits after-tax contributions. After-tax contributions enable you to contribute above and beyond the $20,500 you can defer from your regular paycheck. 

 

In fact, the total contribution limit (including yours and your employer’s via a match) to your 401k in 2022 is $61,000 or $67,500 with catch-up contributions. 

 

Since after-tax contributions don’t lower your taxable income, why consider this approach? It opens other strategic planning opportunities like Roth conversions. 

Look Into An In-Plan Conversion

An in-plan conversion allows you to “convert” approved funds from your traditional 401k into a Roth 401k within the same plan. So, for this strategy to work properly, you’ll need access to both a traditional and Roth 401k at your company. 

 

Like other Roth conversion tactics, you must pay taxes on the conversion in the year you make it, and the money needs to vest in the account for at least 5 years.

 

But in-plan conversions are growing in popularity for several reasons, including:

 

  • Optimizing your current and future tax rate
  • Helping high-earners access Roth dollars without worrying about the income thresholds of a Roth IRA. 
  • Leveraging a down market when investment values may have dipped, thereby reducing your total tax liability 

We can review your situation and determine if an in-plan conversion could make sense. 

 

2. Ensure Your Investments Are Tax-Efficient

Taxes can significantly impact your net returns, making it important to ensure you design your portfolio with ongoing tax efficiency. 

 

One way to accomplish this goal is implementing asset location—a strategy that intentionally places securities within the most tax-friendly account. 

 

Remember, each asset comes with different tax liabilities—mutual funds, ETFs, index funds, bonds, individual stocks, etc., have unique tax considerations. 

 

Generally speaking, assets with a lower ongoing tax liability (ETFs, municipal bonds, stocks you hold for at least a year, etc.) are often best in a taxable account like a brokerage account. 

 

Whereas assets with a higher ongoing tax liability (mutual funds, stocks you hold for less than a year, REITs, corporate bonds, etc.) tend to perform best in a tax-advantaged account since you won’t be responsible for paying the tax until you remove the funds in retirement. 

 

However you invest, ensure your methods are tax-efficient by speaking with a financial advisor before committing to a purchase or trade. After all, you want to keep as much money working and compounding as possible. 

3. Consider A Roth Conversion

Year-end tends to be an excellent time to consider Roth conversions. Remember, a Roth conversion is when you convert assets from a traditional account (IRA, 401k, etc.) into a Roth IRA. 

 

You’ll pay taxes on the conversion, but it could be a good idea if:

 

  • You had a lower income year and are in a reduced tax bracket.
  • You expect to increase your income next year (via stock vesting, bonus, promotion, etc.)
  • Your investments didn’t perform as well, so you want to capitalize on the lower tax liability. 
  • You are about to retire—Roth conversions tend to be advantageous in early retirement

4. Sell Investments That Aren’t Working For You 

Some years result in higher income—appreciating investments, Roth conversions, liquidation events, stock vesting—which could bump you up a tax bracket. This could be a good time to consider tax-loss harvesting or selling poorly performing assets at a loss to offset larger gains.  

 

Bear markets, in particular, will show you which assets have withstood a turbulent economy and which ones have flourished. You can also offset up to $3,000 of regular income and roll over additional losses into subsequent years. 

 

5. Invest Your HSA Balance

We’re big fans of health savings accounts (HSAs) because of the triple tax benefits. 

 

  • Contributions are pre-tax if deducted from an employer’s payroll or if you deduct manual contributions in your taxes.
  • Interest earnings are tax-deferred.
  • Withdrawals are tax-free if you use the money on qualified medical expenses. 

Another reason they’re a great savings option is that you can invest the money to create even more compounding gains. Investing your HSA funds lowers your taxable income and prepares you for future medical expenses.

 

Like traditional retirement accounts, HSAs have contribution limits that could change annually. 

 

Health Savings Account
(Annual Contribution Limits)

2022

Individual Coverage

$3,650

Family Coverage

$7,300

    55+ Catch-up Contribution

$1,000


6. Consider Deferring Some Of Your Income 

If you’re expecting a bonus or other year-end income, like dividends, you may be able to unlock another tax planning strategy: defer it until January 1. Doing so could help reduce your taxes this year and give you more time to make necessary tax adjustments next year.

Some companies also offer deferred compensation plans that allow you to defer some of your income to retirement or other pre-set future date.


7. Know Your Available Deductions 

When filing your taxes, you can choose to take a standard deduction or itemize your deductions.

 

Standard Deductions

2022

Single or Married Filing Separately

$12,950

Married Filing Jointly

$25,900

Head of Household

$19,400

    65+ and Single or Head of Household

+$1,750

    65+ and Married or Qualified Widow(er)

+$1,400


Standard deductions are a flat amount you can deduct from your taxable income. But, if your itemized deductions exceed the standard deduction, you could reduce your MAGI and overall tax liability. 

 

It may make sense to itemize your deductions if you:

 

  • Had a large, out-of-pocket medical expense (you can deduct expenses over 7.5% of your AGI)
  • Experienced a large, uninsured casualty by a natural disaster or theft
  • Made large charitable donations
  • Paid large amounts in mortgage interest on your home (can include the interest on up to two homes)
  • Are self-employed and pay for a home office

You can work with your tax advisor for a full list of itemized deductions. If you itemize keep receipts and other records to prove the expense.

 

8. Plan For Equity Compensation 

Do you have vesting equity options before the end of the year? And are they ISOs, NSOs, or RSUs? Each type carries a different tax liability.

 

  • Qualified Incentive Stock Options (ISOs) are subject to alternative minimum tax (AMT) when exercised (you purchase them for the agreed rate). This is important when the difference between the fair market value and the exercise price (the spread) is high. However, if you sell ISOs during the same calendar year you exercised them, you’ll trigger ordinary income tax due to breaking mandated holding periods.
  • Non-qualified Stock Options (NSOs) profits are taxed as ordinary income when exercised and taxed as capital gains when sold for profit.  
  • Restricted Stock Units (RSUs) are a bit simpler. You pay income tax on the value of the shares when they vest. Pro tip: check how much your company withholds for taxes. They are only required to keep 22%, and if you’re in a higher tax bracket, you may owe more. 

Knowing which type of stock option you have will help you make the best tax-focused decision. Even then, navigating the equity alphabet soup can be complicated. Consider working with your financial advisor to make a high-level equity plan.

 

9. Create A Charitable Giving Plan 

There are several ways you can donate to charities and remain tax-conscious.

 

  • Donate non-cash assets you’ve held for more than a year and avoid capital gains tax.
  • Bunch 2022 and 2023 contributions into 2022 and get above the standard deduction amount to itemize. A great account to facilitate this is a donor-advised fund (DAF). 
  • If you’re over 70.5, make a qualified charitable donation (QCD) of IRA assets to reduce your IRA balance and reduce taxable income in future years. This strategy often makes sense for retirees as it can mitigate required minimum distributions (RMDs). 

There are limits to what you can write off. In 2022, you can donate up to 30% of your AGI for contributing non-cash assets to public charities and up to 60% of cash contributions.  

 

Build A Customized Tax Planning Strategy

Tax planning season is happening right now. If you’re a high earner, being proactive and strategic could save you thousands in taxes next April. 

 

Need help putting together all the pieces? Schedule a free consultation and check out our year-end tax guide.