Year-end Tax Moves

As we approach the end of the year, now is the time to think about your 2022 taxes. While it hasn’t been a great year for markets, there may be an opportunity to reduce your tax burden. You’ll want to review your estimated tax bracket for 2022 and 2023 so you can see where you might land, and make tax moves accordingly.

Tax Deductions and Credits

Determine if you’ll be able to itemize deductions this year. The standard deduction is $12,950 for singles, and $25,900 if you’re married. If you are close to or above those amounts, you might look for opportunities to accelerate deductions into the current tax year. If itemizing, making payments for deductible expenses such as medical expenses, qualifying interest, and state taxes before the end of the year (instead of paying them in early 2023) could make a difference on your 2022 return.

Review if you qualify for any tax credits. There are a number of energy tax credits for those that purchased an electric vehicle or made their homes more energy efficient. The premium tax credit was expanded to include those with incomes above 400% of the federal poverty line.

Maximize Retirement Savings

If you haven’t already contributed up to the maximum amount allowed, to your 401(k) or IRA accounts, consider doing so before the end of the year.  Deductible contributions to a traditional IRA and pre-tax contributions to an employer-sponsored retirement plan such as a 401(k) can help reduce your 2022 taxable income.

For 2022, you can contribute up to $20,500 to a 401(k) plan ($27,000 if you’re age 50 or older) and up to $6,000 to traditional and Roth IRAs combined ($7,000 if you’re age 50 or older).

The window to make 2022 contributions to an employer plan generally closes at the end of the year. You have until April 15 to make your 2022 IRA contribution; however, you may want to take advantage of making your contribution while markets are down.

Roth Conversions

All else being equal, converting traditional IRAs to Roth IRAs makes sense when the market is down.  If you think you’ll be in a lower tax bracket this year than next, 2022 might be a good year to convert some of your IRA to Roth. The deadline to convert for the 2022 tax year is December 31.  

Required Minimum Distributions and Qualified Charitable Distributions

If you still need to take your RMD for 2022, and don’t need the income, you may consider make a qualified charitable distributions (QCDs) from your IRA account. The QCD will help satisfy your RMD and lower your taxable income for the year.  The QCD is excluded from taxable income.

Tax Loss Harvesting

If you have realized net capital gains from selling securities at a profit, you might avoid being taxed on some or all of those gains by selling losing positions. Any losses over and above the amount of your gains can be used to offset up to $3,000 of ordinary income ($1,500 if your filing status is married filing separately) or carried forward to reduce your taxes in future years.  

Gifting

For those considering gifts to family members, now may be a good time.A down market presents an opportunity to gift depreciated assets and shift wealth to family members who are below the estate tax threshold.The potential for long-term growth passes on to the recipient and reduces the donor’s taxable estate.One thing to note, the original cost basis passes on to the donee. In 2022 you can give up to $16k per person ($32k for couples) without owing gift tax.

529 Plan Contributions

Residents in 30 states can contributing to a 529 college savings plan and lower their taxable state income.  Rules vary from state to state.Ohio residents can contribute up to $4,000, per beneficiary. The contributions are deductible on Ohio state income tax returns. Contributions can be made to one or more beneficiaries, and the deductions are not capped.  You have until December 31 to make contributions.  

Business Owners

You may want to review the type of legal entity used for your business. Under the Tax-Cuts and Jobs Act, the C-Corp rate is now a flat rate of 21%.   Pass-through entities such as sole proprietorships, LLCs, and partnerships may be entitled to a 20% deduction before income tax rates are applied. 

Save on Capital Gains

If you have a long or short-term capital gain from selling investments in real estate, a business, securities, section 1231 property, or other appreciated assets, you may be able to defer and eliminate your capital gain tax liability.  The realized capital gain can be invested in a qualified Opportunity Zone Fund during a 180-day period that begins on the date the gain would be recognized for federal income tax purposes.

Bonus Depreciation

2022 is the last year in which a 100% first year depreciation deduction is allowed. Businesses can write off the cost of most depreciable business assets in the year they are placed in service. The deduction applies to depreciable business assets with a recovery period of 20 years or less and certain other property. Machinery, equipment, computers, appliances and furniture generally qualify. Starting in 2023 bonus depreciation will follow a phase-out schedule until its final year, 2026.

Increase Withholdings

Review your withholdings for 2022. If it looks as though you’re going to owe federal income tax for the year, consider asking your employer (via Form W-4) to increase your withholding for the remainder of the year to cover the shortfall. The withholding is considered as having been paid evenly through the year. This strategy can also be used to make up for low or missing quarterly estimated tax payments.