Year-End 2022 Tax Planning Strategies

By John J. Ceparano, CPA/PFS, CFP®, M.TAX

Principal & Wealth Manager

There is Still Time to Make an Impact on Your 2022 Taxes

This year may be ending soon, but it is not too late to take actions that can positively affect your income tax status when you file your tax return in the spring. Consider the following strategies that could help reduce your marginal tax bracket for 2022, regardless of your income level:

Still working

Postpone Your Bonus

Do you expect to receive a bonus this year? Can you push payment into 2023, instead of receiving it in 2022? If so, this would be a relatively simple way to defer and reduce your taxable income in 2022.

401(k) Plan

Are you contributing enough to your employer’s 401(k) plan? In 2022, you can contribute up to $20,500 to your plan ($27,000 if you are 50 or older). The stock and bond market corrections in 2022 provide an opportunity to accelerate your contributions through year end and buy in at lower price levels. Your employer may also match your higher contributions, potentially making contributing to your 401(k) even more attractive. You can still make additional 401(k) plan contributions this year even if you switched jobs during 2022 (if your new plan allows), up to the maximum contribution level between the two plans.

Business Retirement Plans

Do you own a profitable business? If so, you can reduce your taxable income through different business retirement plans, such as a cash balance plan. Depending on your age and business income, the maximum allowable tax-deductible contribution to a cash balance plan could be as high as $305,000 in 2022. Alternatively, solo entrepreneurs who want a simple and inexpensive business retirement plan option can use Individual 401(k) plans to defer up to $61,000 of their business income in 2022.

Elective Pass-Through Entity Tax

Another consideration for the business owner is elective pass-through entity tax. Some states allow you to deduct state taxes through your business entity. This can be more beneficial than itemizing state taxes on your personal income tax return. Talk to your CPA to learn more about how to do this and your state’s eligibility and requirements.

Everyone

Event Management

Did you have a big life change in 2022, such as a marriage, divorce, or death of a spouse? Such events can significantly alter your income tax status. When you file your taxes, make sure your tax withholding strategy or estimated tax payments are appropriate for your new tax status.

Capital Gains Distributions

Any mutual funds that you own can pay out capital gains distributions during the year (even if the net asset value of those funds is down in 2022). You can usually find estimates and timing of any potential capital gains distributions on the website of the mutual fund company. Talk to your Modera advisor and CPA about an appropriate investment strategy if you own any funds in a taxable account that are expected to pay a meaningful capital gains distribution.

Charitable Contributions

You can make your charitable contributions on or before December 31 and get the tax benefit for the full 2022 tax year. Also, if you have an IRA and are taking required minimum distributions (RMDs), you can elect to have your RMD taken out as a Qualified Charitable Distribution (QCD) to be paid directly to a charity. A QCD allows you to not only avoid the taxable income of an RMD, but also obtain a charitable tax deduction.

Donor-Advised Funds (DAF)

DAFs offer you a chance to earn an immediate tax write off by committing to a future series of planned charitable contributions. A DAF may be an ideal solution for people who have experienced an unusually large and taxable liquidity event or windfall (income from an inheritance, sale of a business, stock options, or legal settlement) during 2022.

Estate Loss Carryover

You can potentially benefit from unused losses from an estate or trust that you inherit. Such carryover losses can then be used to reduce income during the rest of your lifetime or until those losses are exhausted.

Roth IRA Conversion

Is 2022 a lower-than-expected income year for you? Do not ignore low-income years when it comes to income tax strategy. This year may present an ideal opportunity to convert your traditional individual retirement accounts (IRAs) into Roth IRAs since stock and bond markets are down and you may be in a lower income tax bracket. Both of these scenarios could reduce the income tax paid on your traditional IRA proceeds. This may especially be the case as you approach age 72 (the age at which the IRS requires that you take minimum taxable distributions from your IRA ). Keep in mind that Roth IRAs have no requirement to make distributions during your lifetime (or your spouses), and your heirs have up to ten years to distribute the balance. Also, there is no income tax paid on Roth IRA distributions, unlike those made from a traditional IRA.

Hurricane Ian

Damaging weather events like Hurricane Ian can present significant challenges and even be life changing. If you are a Hurricane Ian victim, you may be able to deduct a large casualty loss for 2022. You have until February 15, 2023, to file for a casualty loss related to your federal disaster area.

Need Year-End Tax Help?

There may be one or more year-end tax strategies that are potentially relevant to you. Time is running out to act for 2022. We invite you to talk to us about your options and tax action plan for the remainder of this year.

1 https://www.irs.gov/retirement-plans/plan-participant-employee/retirement-topics-401k-and-profit-sharing-plan-contribution-limits
2 https://www.investopedia.com/articles/financial-advisors/092315/cash-balance-pensions-pros-cons-small-biz.asp
3 https://www.irs.gov/retirement-plans/one-participant-401k-plans
4 https://www.wolterskluwer.com/en/expert-insights/whole-ball-of-tax-elective-pass-through-entity-tax
5 https://www.vjrussolaw.com/carryover-losses-capital-loss/
6 https://www.irs.gov/retirement-plans/retirement-plans-faqs-regarding-required-minimum-distributions
7 https://www.irs.gov/newsroom/help-for-victims-of-hurricane-ian

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