Your 2022 Guide to Year-End Tax Planning

Every year, we work with our clients on tax planning, which is a strategic way to minimize taxes through the way you give, save, and invest. Annual tax planning can feel daunting for individuals, and it’s compli­cated by the fact that tax laws can change year over year.

This calendar year (2022) brings limited changes to individual tax laws, as most tax provi­sions like The Inflation Reduction Act affect corpo­ra­tions. The good news for individuals is that some tax oppor­tu­nities may be buried in your tax return. The bad news is that there is not a lot of time to act on them. Even if these hidden oppor­tu­nities do not wholly disappear this year, they could go away by December 31, 2025, when some of the 2017 Tax Cuts and Jobs Act (TCJA) provi­sions are set to expire.¹

Here, we’ll look at deduc­tions and oppor­tu­nities to consider as you prepare to close out your financial year.

Retirement Savings Options

If you are under the age of 50 and looking to make headway on retirement savings, the retirement contri­bu­tions deduction could be a valuable option for you. This elective deferral (contri­bution) is for employees under 50 who partic­ipate in 401(k), 403(b), most 457 plans, as well as the federal Thrift Savings Plan. The annual limit is $20,500 per individual.

If you are age 50 or over, the catch-up contri­bution for employees partic­i­pating in the same types of plans is still available, and the limit remains $6,500 per individual (or $27,000 in contri­bu­tions for the whole year).

For both options, all contri­bu­tions must be made in 2022.

Are you wanting to max out your IRA contri­bu­tions? The limit for individuals remains $6,000 for 2022. And the catch-up contri­bution limit for folks age 50 and over, which is not subject to an annual cost-of-living adjustment, remains $1,000 (or $7,000 in total for the year). IRA contri­bu­tions for 2022 can be made up to the April 17, 2023, filing deadline.

One update to note: For singles and heads of household who are covered by a workplace retirement plan and have modified adjusted gross incomes over $78,000, the deduction for contri­bu­tions to a tradi­tional IRA has been phased out. (See 2022 IRS contri­bution tables.)

Charitable Contributions

If giving is a key part of your tax strategy, it helps that the TCJA of 2017 roughly doubled the standard deduction amounts for chari­table giving. For 2022 tax returns, the standard deduction for individuals is $12,950 and the standard deduction for married couples filing jointly and surviving spouses is $25,900. As you itemize deduc­tions, you may want to bunch two to three years’ worth of chari­table gifts into 2022. (Contri­bu­tions to a donor-advised fund are a great way to use this technique.)

Another change to note is that the SECURE Act shifted the age for required minimum withdrawals from retirement accounts from age 70 ½ to 72. The law does still allow taxpayers age 70 ½ and older to make a Qualified Chari­table Distri­b­ution (QCD) in the form of a direct transfer (up to $100,000) directly from their IRA to a charity, including all or part of the required minimum distri­b­ution (RMD).

This is an excellent way for seniors to take RMDs while reducing their taxable IRA distri­b­ution amount. If you pursue this option, it is critical to send the funds directly from your retirement account to the charity. The contri­bution will be disqual­ified if the money makes a stop in your checking (or other) account along the way. The funds must come out of your IRA by December 31, 2022.

Bundling Deductions

Deduc­tions are crucial to reducing your tax exposure, but it is important to under­stand which ones work for you. Tax deduc­tions such as state and local taxes, including mortgage interest and chari­table deduc­tions, were seriously cut back through the TCJA of 2017. This means you may have to bundle up if you want to itemize.

Depending on your financial and portfolio situation, it still might make sense to accel­erate your mortgage payments. You might even consider paying off more of your mortgage and retiring the debt now that the tax deduction for mortgage interest is capped.

If your 2023 property taxes are billed or levied before the end of 2022, you may want to prepay them and claim them as a deduction if possible. (Note: You cannot claim your 2023 property taxes in 2022 unless they are formally billed by your local government before December 31, 2022, even if you have already paid them.)

Unreim­bursed medical expenses are deductible if they meet the 7.5% Adjusted Gross Income (AGI) floor, so accel­er­ating any medical proce­dures and payments that your health insurance does not cover could also be helpful. This deduction may also include long-term care premiums and home modifi­ca­tions if you’re planning to age in place.

Capital Gains and Losses

You may be able to pursue several different tax-saving oppor­tu­nities within your investment portfolio. Start by reviewing the various sales you have realized this year on stocks, bonds, and other invest­ments. Then check your remaining invest­ments and determine whether they have an unrealized gain or loss. (“Unrealized” means you still own the investment, versus “realized,” which means you have sold the asset.)

You may qualify for a 0% capital gains tax rate for some or all of the long-term capital gains you realize in 2022 (see following chart). If this is the case, then the strategy is to figure out the highest gains you might be able to realize while still taking advantage of this tax break.

Capital Gains Tax Rate	Taxable Income (Single)	Taxable Income (Married Filing Separately)	Taxable Income (Head of Household)	Taxable Income (Married Filing Jointly)
0%	Up to $41,675	Up to $41,675	Up to $55,800	Up to $83,350
15%	$41,675 to $459,750	$41,675 to $258,600	$55,800 to $488,500	$83,350 to $517,200
20%	Over $459,750	Over $258,600	Over $488,500	Over $517,200

Still in place for 2022 is the 3.8% surtax on net investment income. This starts for single people with modified AGI over $200,000 and for joint filers with modified AGI over $250,000. If this applies to you, one strategy is to determine if you have unrealized losses that can be harvested to reduce the amount of surtax.

Loss harvesting means selling certain invest­ments that will generate a loss. You can use an unlimited amount of capital losses to offset capital gains. However, you are limited to only $3,000 of net capital losses that can offset other income, such as wages, interest, and dividends. Any remaining unused capital losses can be carried into future years indefinitely.

Legally decreasing your tax liability requires a strategic tax plan since there are many moving parts when someone has a complex financial life. Making one decision could have unintended conse­quences that ultimately defeat your tax-saving strategy.

As financial advisers, we try to be proactive when it makes sense. Looking at your entire financial picture helps us design a plan to excavate all the “hidden” oppor­tu­nities available to you specifically.

Rick’s Insights:

• Contri­bu­tions to an employer-sponsored plan must be made by December 31, 2022, to qualify for the 2022 tax year.
• The 2017 Tax Cuts and Jobs Act roughly doubled the standard deduction for most taxpayers.
• An additional 3.8% surtax is levied against investment income for high-income taxpayers.