It’s time to take steps on your year-end tax planning, to minimize your 2022 income tax liabilities. This is especially important this year, with the stock market down ~18% year-to-date and inflation tracking at over 8%.
Most of these tax-reducing strategies must be implemented before January 1, 2023, so please call us to review your individual situation in order to help you reduce your income tax liabilities.
Harvesting Investment Losses
The markets have taken a beating this year, but this can be a blessing – albeit a mixed one – at tax time. You can sell off your losing assets at a capital loss, which amount can offset current or future capital gains (you can also offset up to $3,000 in ordinary income!).
If you think your losing investments will be gainers in the future, you can even buy back the assets you sold – but you have to wait 30 days after the sale to do so or risk running afoul of the rules regarding “wash-sales”).
Earlier this year, interest on late tax payments was assessed at a rate of 4%. With inflation, the IRS pushed the rate to a current 6%, which will rise again to 7% as of January 1, 2023. If you believe you will owe a significant amount in income taxes this year, please consult with us (if you haven’t already) to see whether we can help you reduce your liabilities and/or any potential late-payment penalties.
If you make significant charitable contributions annually, it might make sense to bundle two years of those contributions into one year and itemize your deductions for that year. In the next year, with no contributions to account for, the standard deduction might make the most sense. You might want to continue this practice in alternate years.
You can also lower your income tax liability by donating appreciated assets that you’ve held for over a year. You have the option of donating such assets directly or using a donor-advised fund for this purpose. Such funds can give you an up-front tax deduction while allowing you to defer deciding where you want to direct the funds. However, such funds have fees, which is always a consideration.
If you are age 70½ or older, you can also make up to $100,000 in donations of traditional IRA-held assets. While there isn’t any tax deduction for such donations, they can be used to satisfy your annual required minimum distribution (RMD), and since the funds are donated, they don’t count as taxable income.
We’ve discussed converting your traditional IRA to a Roth IRA – so extensively we won’t recap – see our most recent post on Roth conversions here.
Maximize Your 2022 Retirement Account Contributions
We wrote about the increased 2022 retirement account contribution limits in late October of this year. For 2022, the 401(k) contribution limit is $20,500, with an additional $6,500 catch-up for those over age 50 – this is a great time to consider maxing out your 401k contributions if you haven’t already done so.
For IRAs, the 2022 limit is $6,000, with a catch-up of an additional $1,000 for those 50 and older.
We strongly recommend maximizing all your retirement plan contributions for 2022.
Gift Tax Exclusion
The 2022 gift tax exclusion is $16,000. Any individual is permitted to give that amount to any other individual (and as many of them as you choose). These gifts are without strings, and do not reduce your estate tax exemption! Consider gifting before the end of the year.
Whether any of the above strategies, or all of them, or some of them will work for you is a matter which can only be answered after careful review of all the facts and circumstances influencing your 2022 tax situation – consult with us now to develop the best strategy (or strategies) for you and your family.
If you are interested in maximizing your tax planning strategies for 2022, please click here to email us directly – we are always here to help you.
Until next time –