End of Year Strategies to Save On Your 2022 Taxes

As we start the month of December, we thought we might mention some last minute tips that just might help you save on your 2022 taxes.

Do you itemize your deductions, or do you take the standard deduction?

Some taxpayers subtract one overall deduction which is called the standard deduction. For 2022 the standard deduction is $25,900 for married filers who file a joint return, and $12,950 for single filers. Taxpayers age 65 or older get at least $1,400 more. In 2023 those amounts increase to $27,700 and $13,850, respectively – which is something to keep in mind when doing your tax planning. Filers who plan on taking the standard deductions for 2022 and 2023 should consider bunching deductions to benefit their ability to itemize their deductions. Examples of what gets itemized include mortgage interest, state and local and real estate taxes paid (limited to $10,000), charitable contributions and medical expenses.

Often, the best line item for bunching is charitable contributions. There are three key tax breaks to consider when making contributions:

1. It might be beneficial to bunch the contributions and take the deduction in some years and not others. Let’s say there is a taxpayer who normally gives $15,000 to charity in any given year, and that amount plus other deductions come to less than the $25,900 standard deduction for 2022. By making two year’s contributions in one year, the taxpayer could take the standard deduction in one year and itemize for the other, so as to maximize overall tax breaks. A great way to accomplish this is to donate through a Donor Advised Fund (DAF) that allows the donor to take an upfront deduction when writing the check to the DAF, but wait until a later date to direct donations to specific charities. See our article in last month’s issue that further describes the benefits of using a DAF.
2. Another strategy is to donate appreciated investments held longer than one year. Donors can often take a deduction for the fair-market value of the asset, and not be responsible for the tax on its growth.
3. Taxpayers aged 70½ and older can donate directly from their traditional IRA assets. The IRA owner may be able to transfer up to $100,000 to one or more charities and have the donation count toward their required minimum distribution. Although there is no deduction for these gifts, known as qualified charitable distributions, the withdrawals are not considered taxable income. This strategy helps to reduce income adjusted Medicare premiums and taxes on investment income.

If you invest in the stock market, you are probably like most investors, who have seen a decline in the value of their portfolio.

If that is the case, you might want to consider harvesting your investment losses before the end of the year. If you sell a stock at a capital loss, you can use the loss to offset current or future capital gains on winners. In addition, you can take up to $3,000 in losses that will offset ordinary income, such as wages. Any losses not used in the current year, carry forward to future years. If you still like the investment, you can harvest the losses by selling the securities and then repurchase the same holding, as long as its not within 30 days before or after the sale. That would run afoul of the “wash sale rule” which delays the use of the loss. Mutual fund and ETF investors often have more leeway to avoid wash sale issues because they can purchase another fund right away as long as it’s not considered identical to the one that was sold.

You might think about a Roth IRA conversion. This move involves transferring traditional IRA assets into a Roth IRA and paying tax at ordinary income rates on the conversion amount. There are many reasons to consider conversion, especially now. Because of the bear market, most portfolios are down significantly, so there is less tax to pay on the converted money, which is an amazing opportunity. The growth of the funds in the Roth IRA, as well as all withdrawals from the Roth account, are tax free.

This is a powerful way to grow your nest egg. Roth IRAs are also a great way to transfer wealth to the next generation tax free. Because the money is in a Roth IRA, all distributions will ultimately be tax free to the recipients. The withdrawals from a Roth IRA are tax and penalty free as long as you have reached the age of 59½ and the account has been open for five years. Your age does not prohibit you from contributing to a Roth IRA, as long as you have earned income from working. Traditional IRAs will eventually entail a required minimum distribution. However, Roth IRAs avoid required minimum distributions entirely, meaning you can compound the earnings in the account as long as you like.

You might also consider opening an IRA account or contributing to an existing one to get the immediate tax benefit. Contributions to traditional IRAs can be made until 4/18/23, next year’s tax deadline.

As a final note, check your withholding or estimated tax payments to make sure you are not paying in too much or too little. Most taxpayers must pay in 90% of their taxes by the end of the year. The due date is 12/31/22 for salaried employees and 1/17/23 for those making 4th quarter 2022 estimated tax payments. You don’t want to get caught paying underpayment penalties. On the flip side, if you are getting a large refund, you should consider lowering the withholding amounts or quarterly estimate payments and put more money in your pocket throughout the year.

For any questions or clarifications, please reach out to your LMC professional.

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