It’s Time for 2022 Y/E Tax Planning

September 15, 2022
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Hopefully your 2021 income taxes are filed.  How about 2022?  Now is the time for planning for 2022 to know where you are and look at possible tax savings.  We know you can extend the filing date of tax returns but what you can’t extend is December 31.  Many tax strategies need to be in place by December 31.  Time to get it done.  Here are some examples of strategies we have used and are using with our clients:

 

Charity and Donor Advised Funds.  90% of taxpayers use the standard deduction ($12,950 for individuals and $25,900 for couples filing jointly).  It’s not a surprise as the SALT tax deduction is limited to $10,000. So, many taxpayers get no tax break from their philanthropy.  However, you can get deductions for your charitable contributions by bunching them in one year.  For example, if your itemized deductions are close to the standard deduction, double up and pay for 2022 and 2023 at the same time and get some tax benefit.

Another way to do this is to make a contribution to a Donor Advised Fund (“DAF”).  In this case, you put in 3 or more years of contributions in one year and get the full deduction in that year, yet the money stays in place for you to provide “grants” to charities in future years from these funds. Of course, you don’t get two deductions, there is no deduction when the money goes to the charity.  This strategy is particularly beneficial in a year in which your income is higher, like one where you sell a business or a piece of property.  Some of our clients have contributed 5-10 years of contributions all in one year and are sending the money out over time.  BTW, the funds can continue to appreciate while they are sitting with the DAF custodian.

One way to supercharge the tax benefits of the DAF is to use appreciated stock. Within limits, you can get credit for the full market value of appreciated securities and therefore never pay tax on those unrealized capital gains.

 

Tax Loss Harvesting.  With the markets down in 2022, you likely have some unrealized capital losses.  If so, consider selling all or part of them, particularly if you were planning on dumping them for solid investment reasons.  It’s okay to sell losses. In fact, you can sell a holding, take the loss and after 30 days to get back into the exact same security.  You have to be careful to stay out of the specific security for 30 days or it is considered a “wash sale” and the sale is disregarded.  There is a limit to the amount of net losses you can deduct in a year- it is $3,000.  However, losses can be carried over to future years forever.  And, again, if you sold a business or property in 2022, realizing losses can help tremendously.

 

Roth Conversions and Back Door Roths.  We love Roth IRAs. A Roth IRA can grow tax-free for decades and then, under current rules, it can grow tax-free for another 10 years after Mom and Dad pass away.  Roth conversions move pre-tax money, like traditional IRAs and 401ks over to Roth accounts. The amount of the conversion is all taxable on pre-tax money.  Because Required Minimum Distributions start at age 72, a great time to consider conversions is when you have stopped working and you are not yet 72, and even better if you have not yet started social security.  The tax cost of RMDs can be staggering as the pre-tax money continues to grow until 72 and thereafter.  For example, at current tax rates, someone who retired at age 60 with $1 million in IRAs would most likely pay over $1.5 million tax on the IRAs from age 72 to age 95.  Converting to Roth would be about ½ the tax but it would paid sooner.

Think of the growth of a Roth.  If you had converted enough pre-tax money to have $300,000, for example, in Roth conversions at age 70 and lived another 25 years and your investment grew at 6%, you would have $1.3 million in Roth, which your non-spouse beneficiaries could grow for another 10 years and they could have $2.3 million.  We have developed and maintain a proprietary model to analyze this very important area.

Also, 2022 can be an excellent year for any taxpayer to consider a Roth conversion because most investment accounts are down right now. Great time to convert.

A related strategy is to consider Back Door Roths.  Roth IRA contributions are limited to those with an income below $144,000 (or $214,000 for joint).  However, there is no income limitation on eligibility for a non-deductible IRA contribution.  Depending on your age, you can make either a $6,000 or a $7,000 non-deductible IRA contribution and then covert to Roth tax-free, as long as you have no other IRA accounts. If you have other IRA accounts it gets a little more complicated but there are ways to move your IRA to a 401k or 403b and then create a situation for a tax-free “Back Door Roth.” 

 

Qualified Opportunity Zones (“QOZs”). If you expect a big capital gain in 2022, consider moving a part of the gain to a QOZ real estate investment.  Again, we don’t sell any products, we are just aware of strategies to reduce tax and this one is a new and growing one.  Starting in 2018, investors could defer tax on capital gains, by investing some or all it in QOZs.  This program was designed to encourage reinvestment into specific low-income tracts.  However, some of the real estate investments are in places like Los Angeles, Chapel Hill, Charlotte and Washington, D.C.  Under current law, the gain has to be included in taxable income by 2026. However, the capital gain investment money continues to grow and, if held for 10 years or more, there is complete exclusion of all capital gains on this property (almost like a Roth).

 

Section 179 and Bonus Depreciation.  If you have a small business or a farm, consider purchasing a “heavy SUV” or a piece of equipment and putting it “into service” by 12/31.  Section 179 can provide depreciation for the entire business portion of the asset.  However, the Section 179 deduction is limited to the taxable income for the business or farm.  Bonus depreciation, which in 2022 can be available up to 100% of the cost of new or used equipment is deductible even if your business doesn’t make any profit. 

 

Conclusion.  Step one, have your CPA or total wealth manager put together an income tax projection for you for 2022.  Review your 2021 information line by line and adjust for what is expected in 2022, including income, investments, capital gains, deductions and withholdings. Step two, look at the above strategies and perhaps others to see where you can cut taxes.  Your CPA should do more than prepare returns, they should be focused on helping you reduce your taxes. At this time of year, most of our clients have already received one or possibly two income tax projections from us, and we are working with them and their CPAs to finalize strategies.  Step three, get them implemented. Most of the above need to be done by December 31. Christmas and December 31 will be here before you know it.  Happy Tax Planning. Let us know if you have any questions.

 

 

 

Detterbeck Wealth Management is a fee-only financial planning / wealth management company with offices located in Palatine, IL (Chicago area) and Charleston, SC areas serving clients locally and across the country. To contact us about setting up an appointment, please see our contact us page