Rising interest rates, inflation and market volatility make tax planning more essential than ever for taxpayers looking to manage cash flow and pay the least amount of taxes possible.   

As the end of the year approaches, now’s the time for individuals to review their 2022 and 2023 tax situations and identify opportunities and strategies to reduce, defer or accelerate their tax obligations based on their particular circumstances. Here are some things to keep in mind:

Timing income and deductions: Taxpayers should consider whether they can minimize tax bills by shifting income or deductions between 2022 and 2023. Ideally, income should be received in the year with the lower marginal tax rate and deductible expenses should be paid in the year with the higher marginal tax rate. If the marginal tax rate is the same both years, deferring income from 2022 to 2023 will produce a one-year tax deferral. Accelerating deductions from 2023 to 2022 will lower the 2022 income tax liability.

Five actions to consider to reduce or defer taxes: 1. Delay closing capital gain transactions until after year end or structuring 2022 transactions as installment sales so the gain is deferred past 2022. 2. Consider whether to trigger capital losses before the end of 2022 to offset 2022 capital gains. 3. Defer commission income by closing sales in early 2023 instead of late 2022. 4. Accelerate deductions for such expenses as mortgage interest and charitable donations — including donations of appreciated property — into 2022 subject to adjusted gross income limitations. 5, Evaluate whether non-business bad debts are worthless by the end of 2022 and should be recognized as short-term capital loss.

On the other hand, taxpayers who’ll be in a higher tax bracket in 2023 might want to consider ways to move taxable income from 2023 into 2022 so taxable income is taxed at a lower tax rate.

Long-term capital gains: The long-term capital gains rates for 2022 and 2023 are either 0 percent, 15 percent or 20 percent depending on the income tax bracket. In addition, capital gains could be subject to an extra 3.8 percent net investment income tax.

Strategies to potentially lessen your exposure or help avoid long-term capital gains include holding capital assets for more than a year — more than three years for assets attributable to carried interests — so the gain upon disposition qualifies for the lower long-term capital gains rate versus short-term capital gain rates; developing long-term deferral strategies for capital gains, such as reinvesting capital gains into designated qualified opportunity zones; investing in and holding qualified small business stock for at least five years before selling; and charitable donations of appreciated property to avoid long-term capital gains.

Retirement plans: For annual contributions to qualified retirement plans and individual retirement accounts before year end, ensure you contribute the maximum amount allowed. In 2022, an employee can contribute $20,500 — $27,000 if age 50 or over and the plan allows catch up contributions — to a 401(k) or 403(b) plan. For 2023, these limits will be $22,500 and $30,000, respectively. If your employer doesn’t offer a retirement plan, consider a deductible contribution to a traditional individual retirement account of up to $6,000 — add an additional $1,000 for taxpayers 50 or older — by end of the year.

The SECURE Act provides some opportunities as well. Provisions permit a penalty free withdrawal of up to $5,000 from traditional IRAs and qualified retirement plans for qualifying expenses related to the birth or adoption of a child after Dec. 31, 2019. The $5,000 distribution limit is per individual, so a married couple could each receive $5,000. Provisions also allow individuals to contribute to their traditional IRAs in or after the year in which they turn 70½. The age for required minimum distributions from tax-qualified retirement plans and IRAs rose from age 70½ to age 72 for individuals born on or after July 1, 1949. Generally, the first RMD for such individuals is due by April 1 of the year after the year in which they turn 72. Individuals age 70½ or older also can donate up to $100,000 to a qualified charity directly from a taxable IRA. Although a charitable deduction can’t be claimed, the amounts are not included in taxable income and can be used to satisfy the RMD for the year.

Each taxpayer’s situation is unique. Always consult with your trusted advisor when making tax and financial decisions regarding any of the above items.