7 Year-End Tax Planning Strategies for 2022

7 Year-End Tax Planning Strategies for 2022

As we near the end of the year and prepare for the holiday season, Tax Season may be the last thing on your mind. But in many ways, the final months of 2022 may be your last chance to reduce this year’s tax liability. To avoid overpaying Uncle Sam and preserve more of your hard-earned income, consider the following year-end tax planning strategies for 2022.

To potentially reduce this year’s tax bill, consider the following year-end tax planning strategies for 2022:

Strategy #1: Identify Changes to Your Tax Situation

In 2022, the standard deduction is $12,950 for single filers and $25,900 for married taxpayers filing jointly. A general rule of thumb is if you can deduct more than the standard deduction amount in eligible expenses from your taxable income, you should itemize. Otherwise, it’s typically easier and more valuable to take the standard deduction.

If your income and circumstances have been relatively stable since last year, you likely know already if you plan to itemize or take the standard deduction this year. However, if you’re on the fence, there are year-end tax planning strategies you can utilize to reduce your tax liability.

For instance, consider pre-paying certain deductible expenses—for example, charitable donations or out-of-pocket medical expenses—this year so that itemizing makes more sense.

Let’s say you plan to donate $5,000 to charity each year for the next several years. If you have extra cash on hand this year, you may want to consider donating $10,000 or more to your charity of choice so you can itemize your deductible expenses. Then, next year, you can skip your regular donation and take the standard deduction.

The same is true for out-of-pocket medical expenses. If you know you have certain expenses looming for 2023, you can pay them this year to make the most of the associated tax benefit.

Strategy #2: Harvest Capital Losses

Capital gains taxes can eat away at your investment returns over time—specifically in non-qualified investment accounts. Fortunately, the IRS allows investors to offset realized capital gains with realized losses from other investments.

That means you can realize profits on your top-performing investments while selling poor performers to reduce your tax bill this year. If you have substantial losses, you may be able to completely offset your gains and potentially lower your taxable income. Plus, in years like 2022 when markets have struggled, you may have more losses than you think.

We proactively take advantage of tax-loss harvesting to help clients with year-end tax planning.

Strategy #3: Review Your Charitable Giving Plan

Currently, taxpayers who itemize deductions can give up to 60% of their Adjusted Gross Income (AGI) to public charities, including donor-advised funds, and deduct the amount donated on this year’s tax return.

You can also deduct up to 30% of your AGI for donations of non-cash assets. Moreover, you can carry over charitable contributions that exceed these limits in up to five subsequent tax years.

When it comes to year-end tax planning, donor-advised funds (DAFs) can provide opportunities to meaningfully reduce your overall tax liability. For example, if you plan to donate $10,000 each year to your favorite charitable organization, it may be more beneficial to take the standard deduction when you file your taxes.

On the other hand, you can front-load a donation of $50,000 to a donor-advised fund and request that the DAF distribute funds to your chosen charity each year for five years. In year one, you can receive a more favorable tax break by itemizing on your tax return. Meanwhile, you can continue to meet your charitable goals each year via the DAF. Indeed, this strategy can be particularly beneficial in above-average income years.

Better yet, you can donate non-cash assets like highly appreciated securities to a DAF and avoid paying the capital gains tax. In addition, you can take an immediate tax deduction for the full value of the donation (subject to IRS limits). This strategy can also help you diversify your investment portfolio without triggering an unpleasant tax bill.

Strategy #4: Look for Opportunities to Reduce Income

Maxing out your qualified investment account contributions is no doubt important for meeting future financial goals like retirement. However, it can also be a valuable year-end tax planning strategy.

First, be sure to check the contribution limits on your employer-sponsored or self-employed retirement plans for 2022. You can also contribute up to $6,000 to an individual retirement account in 2022 (or $7,000 if you’re age 50 or over).

In addition, individuals with qualifying high deductible health plans are eligible to contribute to a health savings account (HSA).

An HSA can be another great option to save and grow your money since these accounts offer triple tax benefits. Specifically, contributions, capital gains, and withdrawals are all tax-free if you use your funds for eligible healthcare expenses. And like qualified retirement accounts, you can deduct your contributions from your taxable income in most cases to reduce your overall tax liability.

Meanwhile, depending on your compensation plan, you may want to consider deferring part of your income to reduce your taxable income in 2022.

Employees with deferred compensation agreements typically pay taxes on the money when they receive it—not as they earn it. That means if your employer pays you a lump sum per your distribution agreement, you could potentially get hit with a hefty tax bill.

Your distribution schedule depends on your agreement with your employer and can usually be found in your plan documents. If you haven’t reviewed your plan details recently, you may want to revisit them as you do your year-end tax planning to avoid any surprises.

Strategy #5: Take Advantage of Lower Income Years and/or Down Markets with a Roth Conversion

The IRS allows individuals to convert a traditional IRA to a Roth IRA via a Roth conversion. A Roth IRA conversion shifts your tax liability to the present. As a result, you avoid paying taxes on withdrawals in the future. In addition, Roth IRAs don’t require minimum distributions.

With a Roth conversion, you pay taxes on the amount you convert at your current ordinary income tax rate. That’s why it can be a particularly powerful year-end tax planning strategy in tax years when your income is below average.

Similarly, a down market can provide a great opportunity to take advantage of a Roth conversion. Since account values typically decline in a negative market environment, so does the amount on which you’ll pay taxes when converting to a Roth. At the same time, there’s greater potential for future appreciation and withdrawals that are tax-free.

After you convert your traditional IRA to a Roth, any withdrawals you make in retirement will be tax-free if you’re over age 59 ½ and satisfy the five-year rule. In addition, you can leave your funds to grow tax-free until you need them since Roth IRAs don’t have RMDs.

While a Roth conversion can be a valuable tax planning strategy, it doesn’t make sense in every situation. Be sure to consult a trusted financial advisor or tax expert before initiating this strategy.

Strategy #6: Strategically Transfer Wealth to the Next Generation

If you expect to leave significant wealth to your heirs, proper estate planning is key. Fortunately, there are year-end tax planning strategies you can leverage to help minimize your estate’s potential tax burden.

In many cases, gifting is one of the simplest ways to efficiently transfer wealth while reducing your estate. Each year, the annual gift-tax exclusion allows you to gift a certain amount (up to $16,000 in 2022) to as many people as you like without triggering the federal gift tax. Plus, spouses can combine the annual exclusion to double the amount they can gift tax-free.

Cash gifts are generally most common. However, you can also use the annual exclusion to transfer personal property or contribute to a 529 college savings plan.

Alternatively, the IRS allows you to pay educational and medical expenses on behalf of someone else without incurring federal taxes. The only caveat is you must pay the institution directly.

Trusts can also help you transfer wealth strategically while reducing your family’s taxable burden. However, trusts can be varied and complex. Thus, it’s important to consult your financial planner or estate planning attorney to determine if a trust may be an appropriate year-end tax planning strategy for your estate.

Strategy #7: Donate Your Required Minimum Distribution (RMD)

The IRS requires individuals to begin taking minimum distributions from certain qualified retirement accounts once they reach a certain age. As of 2020, required minimum distributions (RMDs) begin at age 72.

You can withdraw more than your RMD amount in any given year—but be prepared for the potential tax consequences. On the other hand, the IRS imposes a penalty of up to 50% if you fail to take your full RMD before the deadline.

Both scenarios can be costly. Fortunately, careful year-end tax planning can help you manage your RMDs to avoid high taxes and other penalties.

If you don’t need the extra income, for example, you can donate your RMD to charity. This is called a qualified charitable distribution (QCD). A QCD allows IRA owners to transfer up to $100,000 directly to charity each year.

QCDs can satisfy all or part of your RMD each year, depending on your income needs. You can also donate more than your RMD amount up to the $100,000 limit. Since QCDs are non-taxable, they don’t increase your taxable income like RMDs do.

It’s important to note that the IRS considers the first dollars out of an IRA to be your RMD until you meet your annual requirement. If you leverage this strategy, be sure to make the QCD before making any other withdrawals from your account.

Looking for Additional Year-End Tax Planning Strategies? Consider Consulting a Trusted Financial Advisor.

This isn’t an exhaustive list of year-end tax planning strategies. However, these ideas can help you determine if there may be opportunities to reduce your taxable burden in 2022.

At the same time, a trusted financial advisor like Benchmark Wealth Management can help you identify which strategies are right for you within the context of your overall financial plan. To learn more, please contact us. We’d love to hear from you.

This article is for educational purposes only and is not intended to be specific tax, legal, or investment advice.


About Rick

Richard W. Stout III is managing director of Benchmark Wealth Management, LLC, with 25 years of experience in the financial industry. He specializes in financial planning and asset management for individuals, families, and institutions seeking to build and monitor durable and sustainable plans for their financial futures. Rick is a Certified Financial Planner™ professional and holds the Accredited Investment Fiduciary® (AIF®) designation. He obtained his MBA from Rensselaer Polytechnic Institute and his BA in Economics and Anthropology from the University of Connecticut. Rick has earned a Master of Science degree in Personal Financial Planning from the College for Financial Planning. He has extensive background experience in lending, credit review and analysis, and real estate and partnership management. Learn more about Rick by connecting with him on LinkedIn.

About Thomas

Thomas J. Britt is managing director of Benchmark Wealth Management, LLC, with 20 years of experience in the financial industry. He specializes in executive financial planning, retirement planning, investing, as well as the management of trusts and endowments. Thomas is a CERTIFIED FINANCIAL PLANNER™ professional. He holds the Master Planner Advanced StudiesSM, MPAS®, Certified Investment Management Analyst® (CIMA®), and Chartered Retirement Planning Counselor℠, CRPC® designations. Thomas earned a Bachelor of Science in Finance from the University of New Haven, an MBA in financial technology from Rensselaer Polytechnic Institute, and a Master of Science in Personal Financial Planning from the College for Financial Planning. He is also a proud veteran of the United States Navy Submarine Force. Learn more about Tom by connecting with him on LinkedIn.

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