It’s tax season!

You and millions of other people are gathering documents smattered with seemingly random number/letter/hyphen combinations.

W-2 K-1 1099 1099-R 1099-DIV 1098 1098-T 1099-INT 1095-A W-4

It’s time to diligently document every dime you brought in and try to find every expense you can deduct.

If you still have to pay taxes after all of that sleuthing – then congratulations! You must have made money.

While it’s nice to know you’ve been a profitable and valuable contributor to the society that we live in by paying your fair share of taxes, I’m sure you’re wondering if you’ve paid too much. We all do. Whether it’s because we are wary of the wasteful tendencies of our federal government or because of the opportunity cost we feel because we’re sure we could do a better job helping ourselves with the thousands of dollars we’ve been taxed; every single one of us wants to be certain we’ve paid what we owe and not a dollar more.

It’s our duty as responsible providers for our families to pay as little as legally obligated to our federal government. Our money is better spent on gifts for children and grandchildren, donations to our churches for buildings or other ministries, directly feeding the hungry, and caring for widows and orphans in our communities. If you agree with that then heed these 5 tips on how to pay less taxes in 2022.

  1. Look at paying taxes over your lifetime rather than year by year. Tax preparers are excellent at taking the data you give them and looking for every deduction and credit you can get in the current tax year. That’s because tax preparers are awesome historians. They look at what has happened in the past tax year and tell you how to lower your tax bill for that year. We all tend to do this. However, it is beneficial to look at your tax strategy over the rest of your life vs. just taking it year by year. When you do this you can decide whether a Traditional IRA or 401(k) contribution makes more sense (deduction in the current year) versus contributing to a Roth IRA or 401(k) (no deduction now, but tax free withdrawals potentially in the future). When you look at taxes over your lifetime you can decide between making a donation in the current tax year or taking the standard deduction this year and doubling up charitable donations next year to be able to itemize a larger amount. You may benefit from Roth conversions, gifts of appreciated stock, or many other tax strategies that don’t necessarily save money in the current year – but could save more over the long term.
  2. Avoid realizing short-term capital gains. If you realized short-term capital gains you probably made a mistake. Long term capital gains (gains realized on an item that you held for at least 365 days) are taxed at advantaged rates that could be as low as 0%. Short term capital gains are taxed as ordinary income, which means that they can push up your income tax to a higher bracket and are taxed at your ordinary income tax rate which could be as high as 37%! The only time realizing a short-term gain might be a good idea is if you’re certain that the price is going to tank and you are going to be able to time the drop in value by selling high even though you’ve held the investment for less than a year. This would apply if you were an Enron investor and had inside information (illegal to use btw) that the company was going to crater so you sold your stock at short term gains. Outside of a situation like this I’m hard pressed to think of any real-world situations where realizing short term gains is a good idea. Buy and hold when you invest. Actively managing your taxable investments can result in potential short term capital gains that are taxed right alongside an actual decrease in value of the portfolio. It’s extremely important to have a long term tax strategy if you have any non-tax-qualified (non retirement) accounts with investments in them.
  3. Give to charity in bulk. I will always advise people to give charitably because it’s the right thing to do and not primarily to save in taxes. However, sometimes folks may be considering giving a large gift outside of their normal monthly giving to their church or favorite charity. When this is the case it may sometime make sense to “double up” your donations to maximize your tax deductions in a certain year.
  4. Consider using a donor-advised fund. This strategy is kind of like the inverted version of the strategy I just listed about “doubling up” donations. If you know you’ve got a large chunk of money earmarked for a charity and it makes the most sense to get a deduction for that donation in the current year but you aren’t ready to actually give the money to the charitable organization you can set up a donor advised fund and make your charitable contribution to it. You’ll still control the money (investment decision-wise) and control when and who it is disbursed to. As long as the money goes to a qualified charity the deduction will stand. Money can stay in the fund indefinitely.
    • Example: John has $100,000 saved up to contribute to his church’s building fund when they finalize the plans to build a new addition for their church. He could really use the tax deduction this year, but it doesn’t look like the church will be ready to move forward until next year at the earliest. John can donate the 100k to his donor advised fund to get the deduction in the current year and then gift the money to his church the following year when they are ready.
  5. Gift appreciated stock. If you have investments in a non-tax qualified account (an account that is taxed on capital gains rates) that you’ve held for more than one year, then consider gifting appreciated positions in the portfolio instead of gifting cash. Gifts of appreciated stock must be made in-kind (which means you must transfer the positions to the charitable organization) so the charity must be able to receive the positions in kind with a brokerage account of their own. Most charities incentivize this kind of giving and so they usually have an account capable of receiving these gifts. The benefit to this method is two-fold because the total value of the positions that are gifted to the charity can be claimed as a deduction and the donor does not have to realize the capital gains on the positions. The charity is tax-exempt so they don’t have to pay the taxes either.
    • Example: John has $100,000 dollars saved that he’s planning to donate to his church. John also has a non-tax qualified investment account he started with $50,000 dollars and invested in a fund that has grown to a total of $100,000 in value. He now has $50,000 in unrealized capital gains in the non-qualified account. John can donate the appreciated investment of $100,000 to his church directly or through a donor-advised fund and will be able to deduct the entire donation (subject to IRS rules) and not have to pay any capital gains taxes on the investment.

This is just the tip of the iceberg as far as long-term tax strategy goes and the options get even more robust if you’re self-employed, have stock options, have other assets like farm ground that you may sell, and more. Remember to find someone who can help with taxes for more than just the current year for 2022 when you’re getting your 2021 taxes sorted out.