2022 Year-End Individual Tax Planning
2022 Year-End Individual Tax Planning
Although this year included some major changes in the tax code as it relates to energy credits (mostly effective in 2023 and subsequent years), it was the first year since the passage of the Tax Cuts and Jobs Act of 2017 that planning for income taxes may feel more “normal” rather than like an introductory class to the latest rules, regulations, or stimulus programs.
Before the end of the tax year, you may consider the following actions as a means of reducing your exposure to income taxes in the current year. Not all will apply to you, but many may. Please contact us to discuss the potential benefit and your eligibility before taking action.
- Defer Income and Accelerate Deductions. The standard of deferring income into a subsequent year while concurrently accelerating deductions to defer income tax costs will continue to provide quantifiable benefits that can be accomplished quickly. WARNING: deferring income tax costs into a subsequent year does not always result in lower tax costs and may in fact increase your tax bill if the rates of taxation are higher in the subsequent year(s).
- Retirement funding/conversions:
- Consider accelerating contributions to your employer provided retirement account up to the 2022 maximum of $20,500 ($27,000 if over 50 years old). In addition, if eligible, make contributions to your Traditional, Roth, and/or SEP IRA retirement accounts to maximize current and potential long term tax savings/deferrals.
- Conversion to a Roth IRA from a Traditional IRA may be taxable. Timing the conversion in a tax year in which your total anticipated taxable income will be low may be beneficial in the long term.
- Qualified charitable contributions instead of Required Minimum Distributions (RMD). Qualified retirement plans have annual distributions requirements once you reach age 72. However, Qualified Charitable Distribution from your qualified retirement account can fulfill any RMD requirements and exclude the earnings from your taxable income concurrently.
- Capital gains tips. Consider holding appreciated capital assets for at least 12 months to take advantage of preferential long-term capital gains rates. In addition, consider utilizing any of the following methods to lessen your taxable gains prior to year-end:
- Mine for capital losses through disposition of publicly traded securities or other capital assets with accumulated losses that you hold against taxable gains you may have already recognized in 2022.
- Maximize use of lower ordinary or capital gains tax brackets. The 0% long-term capital gains rate phases out at $83,550 for joint filers ($41,775 single or married filing separate).
- Contribution of appreciated stock prior to sale. Donating appreciated stock entitles you to a charitable contribution at the fair market value of the stock, and also avoids the capital gains tax if you otherwise sold the stock.
- Bunching itemized deductions. The standard deduction in 2022 is $25,900 for joint filers ($12,950 single). You may consider applying a bunching strategy to gather deductions into a single tax year in which you plan to exceed these thresholds while taking the standard deduction in the preceding and subsequent years.
- Charitable giving: Adjusted gross income limitations are back for 2022
- Medical expenses: Remain subject to a 7.5% of adjusted gross income limitation
- State and local taxes: Capped at $10,000 annually
- Interest expense: Mortgage interest and investment interest can be subject to limitations based on the source of the funds and amount of indebtedness.
- Gifts (cash or property) before year end. Make any gifts sheltered by the annual gift tax exclusion before the end of the year and thereby save gift and estate taxes. You can give up to $16,000 in 2022 to each of an unlimited number of individuals. Transfers of income producing property also may reduce overall income taxes by shifting income to lower income tax family members.
- Keep in mind the current historically high lifetime exemptions from estate tax are scheduled to expire at the end of 2025. Consideration should be given to use of these exemptions to their fullest extent if your estate may be subject to an estate tax in the future.
- Investing in your youth:
- Avoid the Kiddie tax: In 2022, children with greater than $2,300 in unearned taxable income will again be taxed at their parents’ rate. Deferring or moving taxable income to your children does require some thoughtful consideration and can be managed with holdings like tax exempt municipal bonds.
- Saving for education: Amounts contributed to a 529 plan grow tax-free and distributions from the plan are not treated as income to the extent they are used to pay for qualified education expenses. Contributions to a 529 account may also qualify for a state tax deduction.
Other items to consider – Ask us about:
- Consider paying state estimated taxes or withholding before year-end to obtain deductibility before year end. For Arizona taxpayers, the Arizona tax rates have been decreased in 2022 and will move to a complete flat tax in 2023. Therefore, withholding or estimated tax payments based on prior years where your rates may be higher could result in overpayments.
- For those holding virtual currencies or other digital assets, review potential implications of exchanges for other digital assets, events that may result in taxable ordinary income, and what tax rates may apply.
- Consider use and contribution to your Health Savings Account or Flexible Spending Account before year-end to maximize use of the pre-tax contributions. Remember that FSA accounts having expedited spending requirements.
- Modifying your income tax withholding from wages or estimated tax payments to avoid underpayment penalties. Increasing federal interest rates have resulted in increases in the applicable percent rate used for computing underpayment penalties.
- Count the rental vs. personal use days when your vacation home was used personally and rented to third parties as it may impact your ability to deduct the operating expenses for the home. Remember that short-term rentals (such as Airbnb) may NOT be considered a rental and may be subject to other reporting requirements.
- Arizona state tax credit contributions. Dollar-for-dollar state tax credits to eligible organizations can be paid up until April 18, 2023 to receive a 2022 tax credit. For contribution limits and an overview of several popular Arizona tax credit programs, please review our summary on our website.
Subsequent changes in tax law, code, regulations, regulatory guidance, or other precedent may affect the statements above and must be reviewed with your tax advisor before taking any action. Careful consideration and an accurate analysis of the income tax implications of any potential action is highly advised.