Welcome to my first newsletter. Who am I? Let me introduce myself.
My name is Ralph Mendoza and I am an Enrolled Agent. What is an Enrolled Agent? It’s a question I get often.
An Enrolled Agent is someone granted the privilege by the IRS to prepare unlimited individual and business tax returns. In addition, an Enrolled Agent can represent taxpayers before the IRS regarding tax matters.
I have worked over twenty years preparing tax returns. I started working in wealth management, accounting for personal and business expenses, preparing financial statements, and preparing tax returns for ultra-high net worth individuals and families, including dynasty families, celebrities, investors and entrepreneurs. I worked in New York City before moving to Tampa, Florida.
Recently, I saw a need for people who used cryptocurrency to trade and invest in. They were unfamiliar with how they were taxed. I wrote a book to help clients recognize what is a taxable event, how to avoid tax traps, and how to report crypto taxes. It’s called The Crypto Tax Book and you can purchase it here.
I currently own a tax practice helping families with their tax preparation needs. If you need any help with your taxes or have any questions you can contact me at email@example.com
Year-End Tax Planning (Standard Deduction)
With the calendar approaching 2023, here are some tax moves to consider before the year-end. However, it depends on how you file your taxes. There are two ways to reduce your taxable income – the standard deduction and itemized deductions. There are different strategies for reducing your tax burden before year-end using either one. With the itemized deductions you can use some of the strategies from standard deductions. However, with the standard deduction you are limited on ways to reduce your taxable income. Let’s go through some strategies. Shall we?
The standard deduction is a fixed dollar amount used to lower the income you are taxed. For 2022, the standard deduction amounts for 2022 are as follows:
Single or Married Filing Separately $12,950
Married Filing Jointly and Surviving Spouses $25,900
Head of Household $19,400
If you file your taxes using the standard deduction, you can make the following moves before year-end to save on taxes:
- Check Paycheck Tax Withholding
It’s important to check how much withholding you have from your paychecks. This is important if you had a life event including employment changes or life events such as a change in marital status, arrival of a new child or the purchase of a new home.
You can face an unexpected tax bill when filing your tax return if you do not withhold enough in taxes. One thing I tell my clients, is that when you have a dual wage income household or change jobs mid-year, you start withholding at the lowest marginal tax rate, which is lower than the marginal tax rate reported on your tax return. It’s important to increase withholding of taxes to save from owing when filing.
If you receive a large tax refund, you may consider withholding less from your paychecks to increase your cash flow. You can use it to invest and get a greater than 0% return by lending money to the government or the increased cash flow can help pay expenses throughout the year.
You can check your estimate your tax withholding using the IRS tax withholding estimator. You will need your most recent paystub and income tax return to use the calculator.
- Maximize Your Retirement Account Contributions
Pre-tax contributions can be made up until December 31st or the last paycheck of the year if you are an employee who contributes to a 401(k) retirement account at work. In 2022, you can contribute up to $20,500. If you are 50 years old or older, you can contribute an additional $6,500 for a total of $27,000. Matching contributions from your employer do not count towards the limits. However, the combined contributions from your and your employer cannot exceed $61,000 in 2022.
Pre-tax contributions are tax-deferred. Your income is not subject to income tax for contributions made towards your 401(k), however, distributions taken from your retirement account are taxed when taken.
Another retirement account is a traditional IRA. With a traditional IRA, you can contribute up to $6,000 in 2022. If you are over 50, you can contribute $7,000 in 2022. Traditional IRA contributions are deductible from your current taxable income. However, you will pay income tax on distributions from traditional IRAs.
If you have both a traditional IRA and an employer sponsored retirement plan, there may be a limit by the IRS on the amount of traditional IRA contributions that can be deducted from your taxes. IRA contributions can be made on or around April 15th of each year.
If you make a contribution to a Roth 401(k) or Roth IRA, the contributions are made post-tax and there are no deductions reported.
If you are in your benefit enrollment period at work, the 401(k) limit is increased to $22,500 in 2023. If you’re 50 or older, your 401(k) limit is $30,000 in 2023. The IRA contribution limit is increased to $6,500 in 2023 and if you’re 50 or older, your IRA contribution limit is $7,500.
If you have a traditional IRA and an employer sponsored retirement plan then the phase-out ranges for 2023 are as follows:
- For single taxpayers covered by a workplace retirement plan, the phase-out range is increased to between $73,000 and $83,000, up from between $68,000 and $78,000.
- For married couples filing jointly, if the spouse making the IRA contribution is covered by a workplace retirement plan, the phase-out range is increased to between $116,000 and $136,000, up from between $109,000 and $129,000.
- For an IRA contributor who is not covered by a workplace retirement plan and is married to someone who is covered, the phase-out range is increased to between $218,000 and $228,000, up from between $204,000 and $214,000.
- For a married individual filing a separate return who is covered by a workplace retirement plan, the phase-out range is not subject to an annual cost-of-living adjustment and remains between $0 and $10,000.
- Use Up Your Flexible Spending Account Before the Spending Deadline
The Flexible Spending Account or FSA, is a great way to save in taxes when making contributions. Contributions to FSAs or done on a pre-tax basis and any amount used towards medical and/or childcare expenses is not taxable. Depending on your employer, you may have to use your FSA funds by December 31st. Failure to do so and you may lose your money. Some employers have a couple of options:
- Rollover feature of unused funds
- 5 month grace period following year-end for you to use your remaining funds
Your employer may provide one of these options, but not both. Check with your employer to see what options are available to you.
- Tax Loss Harvesting
If you are invested in stocks, mutual funds or cryptocurrencies and have losses in 2022, you can sell them at a loss. This is called “tax-loss harvesting.” Any losses that are greater than your gains can be used up to offset up to $3,000 of other income. Any excess of $3,000 of capital losses will be carried over to the next year and will offset future years income or capital gains. If you are married, filing separate, then you can only use up to $1,500 of capital losses to offset your taxable income with the excess carried over to the following year.
Beware of the wash-sale rule. You cannot sell an investment at a loss and replace it with the same or “substantially identical” investment 30 days before or after the sale. The loss will be disallowed and added to the basis of the newly purchased investment. The wash-sale rule does not apply to cryptocurrency.
- Take RMDs from Traditional Retirement Accounts (if aged 72 or older)
All employer sponsored retirement plans, traditional IRAs, SEP and SIMPLE IRAs mandate required minimum distributions by April 1st following the year you turn 72. After the initial RMD, you are required to make annual withdrawals by December 31st of each year to avoid a penalty.
If you do not take the RMD, you can face a 50% excise tax on the required withdrawal based on your age, life expectancy and beginning of year account balance.
This is a long newsletter. With the next issue I will discuss tax planning strategies for taxpayers that itemize deductions on their tax returns. Would enjoy hearing back if you found these tips to be helpful. I look forward to hearing from you.