After an interesting year with inflation, housing, energy prices, the markets and more in 2022, it’s just as important as any year to find opportunities before year-end. There are common and lesser-known tax items that can result in considerable value.
As a taxpayer, you should first consider your tax bracket and look for ways to optimize it for your benefit. For example, you may want to consider Roth conversions up to the 24% tax bracket. Or, you may want to leverage the lower tax brackets by taking distributions from IRAs or performing Roth conversions up to the 10%, or even 12%, tax bracket. For 2022, lower-income investors (less than $41,675 for single filers and $83,350 for joint filers) pay no capital gains tax on investments held more than a year. Therefore, it may make sense to sell gains investments tax-free and take advantage of that 0% capital gains bracket.
This year has plenty of opportunities for tax loss and even taxable gain harvesting. Depending on the size of the loss, you can calculate how much capital gains you can realize without creating an additional tax burden. Many investors have several losing positions in 2022 and should consider letting go of some positions. Investments held for less than a year are taxed as ordinary income, but investments held longer are taxed at the long-term capital gains rate, which ranges from 0% to 23.8% (including the 3.8% net investment income tax). After matching short-term losses against short-term gains, and long-term losses against long-term gains, any excess losses can be used to offset the opposite kind of gain. If there are still additional capital losses, then you can deduct up to $3,000 of that loss to offset ordinary income for each year going forward until all of that loss is used up. When tax-loss harvesting, remember the wash-sale rule, which requires that you wait 30 days before investing in that same company or buying a substantially identical investment.
Remember to consider basic tax deductions which may include reviewing your tax withholding, staying on top of estimated tax payments, and paying certain bills like medical expenses and property taxes, so that you can possibly qualify for those deductions in this calendar year. Also, consider contributing to a 529 plan and/or custodial brokerage or Roth IRA for your children and, for those families with special needs, you can contribute up to $16,000 a year to an ABLE account which allows people with qualifying disabilities to save money without jeopardizing government benefits.
For those who are 72 and over, remember to take your Required Minimum Distributions (RMD) including those with inherited IRAs who have already been taking RMDs, before the end of the year. Beneficiaries may also be subject to RMDs although beneficiaries under the SECURE Act are currently subject to the 10-year rule. Qualified Charitable Distributions (QCD) are a tax advantaged way of contributing to charity directly from your IRA. Almost all RMDs and QCDs are due by Dec. 31.
Finally, you may want to consider deathbed planning, which involves moving highly appreciated positions into the older spouse’s name, so that the surviving spouse can obtain the step up in basis. Remember that one year must elapse between the transfer and the death to take advantage of this benefit. Similarly, consider transferring any stocks with an unrealized loss to the spouse most likely to survive, so that the loss isn’t wasted at death.
Kevin Theissen is the owner and principal of HWC Financial in Ludlow.