From an investing perspective, the good news about 2022 is that it’s almost over. Even better news! You can use some financial planning techniques to make the most out of a bad year. Here is a list of tips to help you.
First on the List – Capital Losses
First on the docket is losses. If you’ve suffered capital losses in a taxable account, you can sell the investments to reduce your tax liability. You can offset an unlimited amount of capital gains against capital losses. And you can use up to $3,000 in net realized capital losses to reduce your Ordinary Income, which is taxed at a higher rate than capital gains.
For example, Investment C lost $20,000 and Investment D gained $17,000 in 2022. When you sell both investments, the gains and losses offset each other and the total loss is $3,000. You get all of the gains on Investment D for free and can use the $3,000 to reduce your Ordinary Income!
On the other hand, if you only own Investment C in your portfolio, you can use $3,000 of losses this year to reduce your taxable income. You won’t exhaust all of the losses in tax year 2022, but you can carry forward the remaining $17,000 of losses to offset gains in future years and reduce taxable income.
Second Item – Max Out Retirement Savings
Next on the list is maxing out your retirement savings. You can still reduce your 2022 taxes by maximizing your employer-provided retirement savings contributions. The deadline is December 31st and the limit is $20,500 for 401(k), 457, and 403(b) plans.
Third on the List – Asset Allocation
The last item on the list is reviewing your asset allocation. Markets have been tough in 2022 and as a result portfolios could have moved away from their appropriate target. An improper asset allocation is dangerous. You are further away from your goals and you increase your risk. Go through your list of assets and see how they compare to your desired allotment.
Remember the deadline is December 31st to fulfill the items on your list! Make it fast like Dasher, Dancer, and Prancer. Don’t delay. If you have any questions, set up a free consultation.