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1. If your income is higher in 2022, postpone your bonus to 2023
If you had a strong year and expect lower wages in 2023, you can try to postpone a holiday bonus until the new year, experts say.
“It’s always exciting to get hard work rewarded with a year-end bonus,” says Lisa Greene-Lewis, a CPA and tax expert with TurboTax. “But sometimes, that can knock you up into another tax bracket.”
However, when you receive the money in January, you can reduce the income of 2022 without waiting too long for the money, if your company allows it, he said.
2. Prepay future medical expenses for a deduction
It is not easy to claim the medical expense deduction. For 2022, there is a tax break for unreimbursed medical expenses that exceed 7.5% of your adjusted gross income. But can only claim it if you itemize deductions.
Typically, you’ll itemize if deductions — including charitable gifts, medical expenses and more — exceed the standard deduction, which is $12,950 for singles or $25,900 for married couples filing jointly for 2022.
While it is difficult to plan for medical expenses, you are more likely to maximize the deduction by “grouping” expenses for two years in one, explained certified financial planner Marguerita Cheng, CEO of Blue Ocean Global Wealth in Gaithersburg, Maryland.
For example, with multiple children in braces, you can ask to prepay the remaining balance before the end of the year if you can afford it, he suggests. “The provider can also give a discount for paying everything earlier,” said Cheng, who is also a member of CNBC’s Financial Advisory Board.
Of course, you’ll need to project your adjusted gross income, total itemized deductions and calculate your pre-2022 medical expenses first.
3. ‘Maximize your bracket’ with a partial Roth conversion
With the S&P 500 Index down about 15% by 2022, you can look at a Roth Individual Retirement Account conversion, which transfers pre-tax money to a Roth IRA for future tax-free growth. The trade-off is that you will owe upfront tax on the converted amount.
The strategy can pay off when the market dips because you can buy more shares for the same amount, and there is a chance of tax savings on the converted portion.
However, depending on your income level, you can also consider a partial conversion every year, experts say.
“If you’re retired or close to retirement and your income is down, you want to consider filling out enough to maximize your bracket,” said Thomas Scanlon, a CFP and CPA at Raymond James in Manchester, Connecticut.
For example, if you are already in the 24% bracket, it is possible that there is still room for more income before triggering the 32% on the excess amount, he said.
Scanlon said partial Roth conversions work well for retirees with “light and asset-heavy incomes,” such as someone who leaves the workforce with several years before they have to start taking required minimum distributions.