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Don’t Let Uncle Sam Get More Than His Fair Share

Tax season is in full swing and I can hear the collective groan of US taxpayers as we calculate how much is owed by April 15th. It can be a pretty helpless feeling each year, as the final numbers become clear, but let me be an encouragement to you and point out some ways that you CAN take control of at least some areas of your tax return.

First, if you have investment accounts that are creating taxable income, focus on choosing tax-smart investments. For example, hold investments that create qualified dividends instead of ordinary dividends. Qualified dividends are taxed at 0% to 15%, while ordinary dividends are taxed at your normal tax rate. For fixed income, mix in some municipal bond funds, whose interest is federal income tax free. Or keep the interest off of your tax return all together and use tax-deferred, guaranteed-rate fixed annuities.

Second, if you’re taking Required Minimum Distributions and also giving any money away to charities during the year, PLEASE use the Qualified Charitable Distributions rule to lower your taxable income. By instructing your IRA custodian to send a portion of the RMD straight to your charity, you can exclude that gift amount from your taxable income. Super easy – just remember that you can’t take possession of the funds; it has to go straight from the custodian to the charity.

Third, if you’re working and have access to a high-deductible health plan, set up a Health Savings Account and take a tax deduction for funding it: $3,850 for an individual or $7,750 for a family in 2023, plus another $1,000 if you’re over age 55. An HSA is triple tax-advantaged: You get a tax deduction, it grows tax-deferred and it’s tax-free when you use it for a wide range of medical expenses. It’s not too late to fund an HSA for 2022 if you were already in a high-deductible health plan. You have until the tax filing deadline to do so.

Lastly, a little trickier idea, but if you’re in the mood to do Roth IRA conversions and you also have a charitable bent, consider doubling up your charitable giving into one year to create enough of a tax deduction to offset the taxable Roth conversion. You build tax-free wealth in a Roth IRA and your favorite charity gets to help the world be a little better place. Let me know if you’d like to learn more about any of these strategies – saving taxes is one of my specialties!


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