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If you’ve had a strong year and expect lower earnings in 2023, you may try to defer a holiday bonus until the new year, experts say.
“It’s always exciting to reap the rewards of hard work by getting a year-end bonus,” said Lisa Greene-Lewis, a CPA and tax expert with TurboTax. “But sometimes that may bump you up into another tax bracket.”
However, by receiving the money in January, you may reduce 2022 income without waiting too long for the funds, assuming your company allows it, she said.
It’s not easy to claim the medical expense deduction. For 2022, there’s 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 single filers or $25,900 for married couples filing together for 2022.
While it’s difficult to plan for medical expenses, you’re more likely to maximize the deduction by “bunching” expenses for two years into one, explained certified financial planner Marguerita Cheng, CEO of Blue Ocean Global Wealth in Gaithersburg, Maryland.
For example, with multiple children in orthodontic braces, you may ask to prepay the remaining balance before year-end if you can afford it, she suggested. “The provider may also provide a discount for paying off everything sooner,” said Cheng, who’s also a member of CNBC’s Financial Advisor Council.
Of course, you’ll need to project your adjusted gross income, total itemized deductions and tally your previous 2022 medical expenses first.
With the S&P 500 Index down around 15% for 2022, you may be eyeing a Roth individual retirement account conversion, which transfers pre-tax funds to a Roth IRA for future tax-free growth. The trade-off is you’ll owe upfront taxes on the converted amount.
The strategy may pay off when the market dips because you can buy more shares for the same dollar amount, and there’s a chance for tax savings on the converted portion.
However, depending on your income level, you may also consider a partial conversion annually, experts say.
“The bottom line is if you are in retirement or near retirement and your income is down, then you want to consider filling up enough to maximize your bracket,” said Thomas Scanlon, a CFP and CPA at Raymond James in Manchester, Connecticut.
For example, if you’re already in the 24% bracket, it’s possible there’s still room for more income before triggering 32% on the excess amount, he said.
Scanlon said partial Roth conversions work well for retirees who are “income light and asset heavy,” like someone who leaves the workforce with several years before they have to start taking required minimum distributions.