The clock hasn’t yet run out on tax strategies for 2022.
Moves that need to be completed before the last day of this year, said Lawrence Pon, a CPA in Redwood City, Calif., include reviewing portfolios for harvesting losses.
“The tax rates for capital gains are at zero, 15% or 20%,” he said. “Take advantage [because] there’s always the chance Congress may do away with the preferential capital gains tax rates.”
“The most common move is reviewing year-to-date tax exposure in taxable accounts,” said Emerson Ham III, senior partner at Sound View Wealth Advisors in Savannah, Ga. “Particularly in a difficult market year, as 2022 has certainly been, clients and advisors need to make sure they’re minimizing tax exposure through tax loss harvesting where it makes sense. The difficult decision is whether to reinvest proceeds from tax loss sales in something similar to what has been sold, not too similar due to wash sale rules, versus leaving the proceeds in cash for the required 30 days.”
Ask brokerages if requests this late in the calendar will be on a “best-efforts basis” only, Ham added, meaning they may or may not happen in 2022 itself—a key point in planning.
Also keep in mind timing and proof of when a tax move happened. If using the mail to make a tax-planning transaction, for instance, use a U.S. Postal Service tracking method such as Priority Mail with tracking and a signature required or certiļ¬ed or registered mail. Print dated email confirmations of electronic transactions.
“Very few Americans itemize and take the standard deduction because it’s been significantly increased,” Pon said. “For those who may itemize, look at paying medical expenses before the end of the year, making large charitable contributions, paying the December mortgage payment in December to claim the interest and so on. We used to look at prepaying state income taxes or property taxes, but due to the state and local tax limitation of $10,000, that move is now irrelevant.”
Among his other suggestions: Starting in 2023, the bonus depreciation will decrease from 100% to 80%, so it may make sense to put business equipment into service in 2022 to get the full bonus depreciation; and see if it makes sense to purchase an electric vehicle in 2022 versus 2023 due to the new AGI and pricing rules that kick in on Jan. 1.
“Roth IRA conversions completed in 2022 can join two opportunities together if a taxpayer had a decrease in income and a decline in their retirement account values,” said Michael Prinzo, managing principal of Tax at CLA in Greenwood Village, Colo. “If taxpayers are in a lower income tax bracket in 2022, the income resulting from a traditional IRA converted to a Roth IRA may be subject to a lower tax rate. When market values recover, the future appreciation would occur in a tax-free account as long as the taxpayer meets the holding-period requirements.
“For taxpayers who have taxable investment accounts, consider donating appreciated securities instead of cash,” Prinzo said. “By donating appreciated securities, a taxpayer can get a deduction for the fair market value of the security, and they can avoid paying tax on appreciation.”
Clients who have to take required minimum distributions need to complete qualified charitable distributions as soon as possible and certainly need to complete their entire RMD by year end, Ham said.
“Most clients are aware that they have until year’s end to make many moves,” he added, but “many forget that those that qualify can make 2022 IRA or Roth contributions up until tax filing deadline in 2023.”
Above all, year’s end may be the best time for tax projections. For next year, for example, significantly higher catch-up amounts for contributions to 401(k)s and the like can make a serious financial look ahead pay off a year from now. “Not only should we look at 2022 tax planning, but 2023 tax planning,” Pon said.