If you set expectations now for your clients, you will be able to mute their shock when their 2022 tax bill comes due. Your tax-curious prospects are also probably keen to hear how they can save on their taxes. But there’s a fly in the ointment: Washington. Will Congress change any tax laws before 2022 ends?
“The remaining tax legislative push for 2022 primarily relates to the 2023 budget bills,” says veteran Washington observer Mark Luscombe, principal analyst at Wolters Kluwer Tax & Accounting, in Riverwoods, Ill. “After the November elections there will be a focus on enacting those bills by December 16,” when federal government funding ends. The outcome of the November 8 elections may shape what’s in, or out of, eleventh-hour legislation, he says.
A variety of popular provisions expired at the end of 2021, and some of them won’t be revived, Luscombe believes. That means parts of the American Rescue Plan Act of 2021, including those that expanded the child tax credit and credit for dependent care and childcare, are already gone, and the question is whether they will be resurrected.
Another expired break is an above-the-line charitable deduction for people who don’t itemize. Luscombe, however, thinks this one stands a better chance of being revived than another expired break that allows charitable itemized deductions of up to 100% of adjusted gross income for cash contributions. Beneficent itemizers should likely count on a return to a 60% limit for their cash gifts, for now anyway.
On the bright side for high earners, Luscombe sees little immediate desire among legislators to prohibit backdoor Roth conversions, a technique (albeit taxable) for moving money from a traditional retirement account to a tax-free Roth when the client earns too much to contribute to the Roth directly. Clients who can benefit should get moving on their backdoor Roth conversions before Washington’s mood shifts.
Clients must be reminded, however, that under current law, Roth conversions can’t be reversed with a recharacterization, says Chad Smith, a managing partner of Retirement Planning Specialists, Inc., a planning firm in Ashland, Ore.
RMD Angst
In taxable accounts, investors can sell their currently depressed assets at a loss to offset gains and shield taxes on up to $3,000 of other income. But there’s no way to make lemonade out of sour investments in their tax-advantaged accounts. That’s a quandary for clients who are taking required minimum distributions and “might not be happy about selling assets in a bear market,” Smith says.
One solution to this problem is for RMD clients to quickly build cash in their retirement accounts so there will be less need for them to unload losing positions, says Jeremy Keil, a planner with Keil Financial Partners in New Berlin, Wis. Investors shouldn’t let any cash already in the account sit idle. Money market mutual funds now yield north of 2.0%.
Clients should also consider taking dividends and capital gains distributions in cash, rather than reinvesting into additional shares. December is a big month for fund distributions and corporate dividends. “This could raise cash for the client’s RMD. It might not cover the full amount, but it should help,” Keil says.
Clients who don’t need their required distributions for spending cash could consider an in-kind distribution. This involves transferring securities from a traditional retirement account to a taxable account, ideally at the same institution to keep things relatively simple. “You want to do this with the investments that have dropped the most,” Keil says.
Smith says, “The client will be taxed on the transfer, and the investment’s cost basis in the taxable account is determined by the date of transfer.”