Three Tax Planning Tips To Lower Your Tax Burden

We know that everyone has a unique tax situation and that is why at Fairview Capital we create personalized asset allocation strategies designed specifically for your situation, timeline, and goals.

We focus on lowering your tax burden throughout the year. By working with a Marin County wealth management firm, such as Fairview Capital, you can take steps to reduce your tax burden. We have an in-house investment research team dedicated to researching and selecting securities for your portfolio, and we take tax implications into account whenever making purchase, sale, and rebalancing decisions.

Here are three tips to lower your tax burden:

1. Contribute to a 401(k) plan

If your employer offers a 401(k) plan, contributing as much as you are able may reduce your tax burden in several ways. Your contributions will also work towards funding a comfortable retirement. Many employers will match a percentage of what you contribute, so the additional savings is a huge advantage.

If you contribute to a traditional 401(k), the money is deducted from your paycheck pre-tax. Another advantage of 401(k) plans is that the annual contribution limit is much higher than other tax-advantaged retirement vehicles, such as Individual Retirement Accounts (IRAs).

For 2022, the annual contribution limit for a 401(k) was $20,500. It has increased to $22,500 in 2023. That’s a substantial amount to tax shelter each year and contribute to your retirement nest egg. If your employer offers a match, the total limit on employer and employee contributions to your 401(k) is $61,000 for 2022. The Internal Revenue Service (IRS) allows “catch-up” contributions for individuals 50 and over. The total with catch-up for 2022 is $67,500 for your and your employer’s 401(k) contributions. The contribution limits are higher for a 401(k) vs. an IRA. The contribution limits for IRAs were $6,000 in 2022 and are $6,500 in 2023. For people ages 50 and over, they can contribute an additional $1,000.

The money invested in a 401(k) grows tax-free until you withdraw it at retirement. Many people’s income in retirement is lower than it is in their peak earning years, so you may be in a lower tax bracket at that time.

One additional note: some employers offer a Roth 401(k). If you are choosing between a traditional and Roth 401(k), note that the tax treatment of each is very different. Roth 401(k) contributions are not pre-tax. They are made with already taxed income. However, your withdrawals in retirement will not be taxed. The contributions of both types grow tax-free in the interim. A Roth 401(k) can benefit you by providing a source of tax-free income in retirement.

2. Contribute to a savings plan for medical expenses

There are two types of savings plans for medical expenses. Both have tax benefits and may lower your tax burden. To be eligible for the first type, a Health Savings Account (HSA) you must have a High Deductible Health Plan (HDHP). For 2022, an HDHP is defined as one having a $1,400 deductible for a single person and $2,800 for a family.

If you are eligible, you can contribute as much as $3,650 pretax for an individual and as much as $7,300 pretax for a family, which lowers your tax burden considerably. In addition, your withdrawals from the HSA are not taxed as long as they are used for qualified purposes. Note, withdrawals are subject both to Federal tax and to a 20 percent tax penalty if you use them for non-qualified purposes. You can roll over the money you save indefinitely.

Rollovers are generally not available with the other type of tax-advantaged health plan, Flexible Spending Accounts (FSAs). FSAs must be used within a year and have a grace period of several months. In other words, you could theoretically save your HSA contributions to use at or in retirement.

If you aren’t eligible for an HSA, consider an FSA if your employer offers one. Like HSAs, contributions are taken out pretax, for tax savings. You can save as much as $3,050 in 2023 and $2,850 in 2022.

The money in an FSA must also be used for qualified expenses, which include both medical care and broader expenses, such as child care. Note, though, that you may lose the money if it is not used within the year and grace period. Employers may also choose to let employees roll over $610 in 2023 for one year past the year of savings, but they cannot give you a grace period if they choose this option. FSA funds are not rollable indefinitely as HSAs are.

3. Donate to charity

If you itemize deductions, you may be able to lower your tax burden by donating to charities. Note that the recipient must be a qualified 501(c)(3) organization.

For both 2022 and 2023, you can contribute up to 60 percent of your adjusted gross income (AGI) annually in cash. You may also contribute assets with a short-term capital gain of up to 60 percent of your income. If you contribute assets with a long-term capital gain, the assets can equal 30 percent of your AGI.

If you own stocks that have appreciated substantially, you may be able to avoid capital gains tax by donating the stocks to charity. The amount of the deduction will be the fair market value of your shares at the time you contribute them.

Consult a Marin County Financial Planner for Tax Strategies

These three tax strategies may lower your tax burden. But, of course, there are many other strategies to optimize your taxes. Taxation is complex and subject to frequent changes in rules and regulations. The financial professionals at Fairview Capital will work closely with your CPA (Certified Public Accountant) to create a wealth management plan optimized to your individual needs.

At Fairview Capital, we believe that comprehensive wealth management is about our clients and their loved ones. It’s about serving their needs for today as well as tomorrow. And it’s about planning for future generations and philanthropic aspirations. Contact us today for more information.

The information contained in this communication is provided for general purposes only, and was prepared in reliance on independent, third-party sources that Fairview Capital Investment Management, LLC (“Fairview Capital”), an SEC-registered investment adviser, believes are reliable. Nevertheless, Fairview Capital does not guarantee its accuracy or timeliness of any information provided herein. The information reflects subjective judgments, assumptions and Fairview Capital’s opinion on the date made and may change without notice; Fairview Capital is not obligated to update this information. Nothing in this communication should be construed as investment or tax advice, a solicitation, offer, or recommendation, to buy or sell any security. Investment management services are offered only pursuant to a written investment management agreement, which investors are urged to carefully read and consider in determining whether such agreement is suitable for their individual needs and circumstances. The information in this communication should not be construed as an endorsement, recommendation or sponsorship of any company or security. If this post mentions a specific investment or security, we or our affiliates may have a position in that security (either long or short), and we may profit from a price change in that security.

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