In yet another transformative year for taxes, some strategies have taken on more importance while others remain sensible standbys. Given that the next few years all but guarantee more changes, what are clients’ best moves for the rest of 2022?
“Taxes are in a perpetual state of change, which always creates opportunity,” said Rob Cordasco, a CPA and founder of Cordasco & Company in Savannah, Ga., and author of "A Framework for Growth: Smart Financial & Tax Planning Strategies Throughout the Entrepreneurial Life Cycle." He added that we’re now halfway through tax changes brought about the Tax Cuts and Jobs Act that are due to sunset in 2026. “Optimize its benefits while it still remains,” he said.
The attempted Build Back Better program highlighted potential policy changes and the Democratic agenda. “Our wealthy clients are aware that this agenda or potential policy change is targeted at the high-income earners, businesses and wealth transfer,” Cordasco said. “We believe these political undertones will take root in tax law, particularly as budgetary needs grow.”
“The general tax and planning laws haven’t changed—yet,” said Jim Bertles, managing director at Tiedemann Advisors in Palm Beach, Fla. “Wealthy clients are mostly concerned with what tax and planning law changes might occur in the future, and when.”
"Proposals floated right now include limitations on the use of some trusts and family valuation discounting structures, gaining recognition on transfers of assets to and from trusts and elimination of step-up in basis,” Bertles said. “Conventional wisdom is that none of the more draconian proposals will pass given the current political climate. ... Current law requires the existing $12.06 million transfer tax exemption to be reduced to approximately $6 million on [in 2026], so there is somewhat of a use-it-or-lose-it mentality with many clients.”
“Wealthy clients are still worried that taxes will go up in the future, and personally, they’re worried about taxes especially once they have to take Social Security and required minimum distributions,” said Michael Garry, founder of Yardley Wealth Management in Yardley, Pa., and author of "The Smart Person’s Guide to Financial Planning & Investments."
Cordasco said these are some ways to reduce your tax bill this year:
• Bunch charitable donations into the same tax year but far apart, such as on Jan. 1 and Dec. 31.
• Consider dividend-producing investments. Qualified dividends are taxed at the long-term capital gains tax rate rather than at a higher ordinary-income tax rate. Investments that produce interest are generally taxed at ordinary-income rates. Stocks that pay qualified dividends may be more attractive tax-wise than other income investments, such as certificates of deposit and taxable bonds.
• Use unrealized losses to absorb gains. To determine capital gains tax liability, realized capital gains are netted against realized capital losses. Both long- and short-term gains and losses can offset one another.