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2022 Year-End Tax Planning Tips

October 10, 2022

There are still actions you can take (up until December 31, 2022) to reduce your 2022 tax liability!  Moves that include deferring income or harvesting investment losses could potentially minimize the taxes on your income and investments.

To begin, what’s the difference between a tax credit and a tax deduction?

  • Tax credits reduce the amount of tax you owe.
  • Tax deductions reduce your taxable income.

Tip: Time your income and deductions.

It is important to consider what your income and taxable deductions could look like next year prior to taking any actions in the current year. For instance, it is usually a good idea to defer income into next year and accelerate deductions into this year to reduce this year’s taxes.

However, if you expect to be in a higher tax bracket next year or if you expect tax rates to increase you may be better off accelerating income into this year so that it is taxed at a lower rate and deferring deductions into next year when they will be worth more to you.

While it is difficult to time income such as your paycheck, you may be able to control when you receive other types of income, such as income from self-employment, retirement accounts, and the exercise of stock options.

Timing deductions generally involves paying deductible expenses and making deductible charitable contributions in the year that will benefit you more. So, if you decide that accelerating deductions into the current year will be more beneficial to you, you may want to make some charitable contributions before the end of this year that you planned to make next year. As a reminder you can only deduct charitable contributions if you itemize deductions.

Timing income and deductions can sometimes have unintended consequences, such as increasing your income enough to make you ineligible for certain tax breaks or triggering the alternative minimum tax, so it is critical that you speak to a tax advisor about your specific situation before making any moves.

To view the 2022 Vermont and federal tax brackets please refer to Davis & Hodgdon’s 2022 tax tables brochure.

Tip: Maximize your charitable contributions.

There are a few smart strategizing actions you could take to maximize your contributions:

  • Donate appreciated securities instead of cash. You can increase your tax benefit by donating highly appreciated securities such as stocks, mutual funds, etc. instead of cash. As long as you owned the securities for more than one year and itemize deductions on your tax return you can deduct the securities’ current fair market value and avoid having to pay capital gains tax on their appreciation. Also, you can buy new shares of the same security with the cash you were planning to donate. The new shares will generally have a higher cost basis than the appreciated shares you donated which will benefit you taxwise when you eventually sell the new shares.
  • Consider bunching charitable contributions if it helps you itemize deductions. If you normally claim the standard deduction and make regular donations to your favorite charities, making two or more years’ worth of donations in a single year may help you deduct more this year if it boosts your total itemized deductions for the year over the standard deduction.
  • Make charitable distributions from your IRA. If you are age 70 ½ or older you can generally have up to $100,000 per year distributed directly from your traditional IRA to qualifies charities. Although charitable distributions are NOT deductible as a charitable contribution, they are nontaxable. And if you are age 72 or older, they count toward your IRAs required minimum distributions (RMD) for the year. It’s important to note that part of your charitable distribution may be taxable if you make deductible contributions to an IRA after age 10 ½.
  • Consider using a donor-advised fund (DAF). If you want to make a charitable contribution and claim a deduction for it on this year’s tax return, but you haven’t chosen the charity yet, consider contributing to a DAF before the end of the year. The cash and any other assets that you contribute are tax deductible in the year that you contribute them to the DAF – even if you don’t recommend grants to your chosen charities until after that year. DAFs can be a very tax-savvy method for charitable giving, and you can read more about it here.

Tips for investments held in taxable accounts.

  • Use investment losses to reduce your tax bill. If you have investments in a taxable account that has decreased in value since you purchased them, you may be able to reduce your taxes if you sell some of them before the end of the year. This strategy is known as tax-loss harvesting. Here’s how it works - When you sell a stock, mutual fund, or other security in a taxable account at a loss, you can use that loss on your tax return to reduce the capital gains and up to $3,000 ($1,500 is married filing separately) of the ordinary income you must pay taxes on. And if your loss is not fully used on this year’s tax return, the unused portion of it can be carried forward and used in future years. When harvesting tax losses, be careful not to buy a substantially identical security within 30 days before or after the sale. If you do, you will have what is known as a wash sale and cannot deduct the loss on this year’s tax return. Also noteworthy is that this strategy does not apply to 401(k) accounts and IRAs.
  • Give appreciated securities to family members who are eligible for a lower tax rate. Do you normally give cash to family members? If they are eligible for a lower tax rate on capital gains than you are, you may want to give them appreciated securities to sell rather than selling the securities yourself and giving them the cash. But be sure to consider the kiddie tax before using this strategy. Note that this strategy applies to securities that are held in taxable accounts, not retirement accounts.

While there are several tax-savvy strategies that are worthy of you consider prior to year-end, you should not act on the information presented without seeking prior professional advice. Check with your tax advisor about your specific situation or click here to reach out to us at Davis & Hodgdon CPAs for guidance.

Resources:

*Copper Leaf Financial Eye on Money November/December 2022 publication

*Copper Leaf Financial is an affiliated and separately registered entity.