Here’s a look at some tax planning considerations for individuals as we approach year-end.

2022 Tax Law Changes

There have been few major tax law changes from 2021 to 2022.  One item of note is that several tax credits will return to their pre-pandemic levels, which may result in smaller refunds or balances due with 2022 federal tax return filing.  Changes include amounts for the Child Tax Credit (CTC), Earned Income Tax Credit (EITC) and Child and Dependent Care Credit.

  • Those who got $3,600 or $3,000 per dependent in 2021 for the CTC will, if eligible, get $2,000 for the 2022 tax year.
  • For the EITC, eligible taxpayers with no children who received roughly $1,500 in 2021 will now get $500 in 2022.
  • The Child and Dependent Care Credit returns to a maximum of $2,100 in 2022 instead of $8,000 in 2021.

Retirement planning

There’s still time before the end of 2022 to make tax-saving moves with your retirement plans.

  • If you have earned income, consider maximizing contributions to retirement plans.  Remember that for traditional and Roth IRAs, and most self-employment retirement plans, you actually have until the tax filing deadline (and in some cases the extended deadline) to make contributions for 2022.

  • Consider Roth conversions – Roth conversions are a strategy where you move money from pre-tax retirement accounts over to Roth retirement accounts. You pay tax on the transfer of the money now, but it then grows tax-free and can be withdrawn in retirement tax-free. This can be beneficial when you think your current tax rate is lower than or equal to your future expected retirement tax rate. Weigh the benefits of converting Traditional IRA to a Roth IRA to lock in lower tax rates on some pre-tax retirement accounts. 
    • Remember that Roth Conversions can no longer be recharacterized so there’s no reversing once executed.
    • Keep in mind that Roth conversions will be more beneficial when the tax can be paid by funds outside of the IRA.
    • Remember that all IRA balances are included in the tax calculation of the conversion limiting the ability to only convert after-tax amounts.

  • If you have reached age 72, be sure to take your required minimum distributions from your retirement plans before year end.  Some beneficiaries of inherited IRAs may also need to take a required minimum distribution before year end from their inherited IRAs.  

Investment tax strategies – see this post with specific portfolio tax strategies.

Charitable contribution planning

If you are planning to donate to a charity, it may be better to make your contribution before the end of the year to potentially save on taxes.  However, keep in mind that for most charitable giving strategies, you need to itemize deductions on your federal tax return to obtain a tax benefit.

  • Consider donation of appreciated assets that have been held for more than one year, rather than cash. 
  • Consider opening and funding a Donor Advised Fund (DAF) as it allows for a tax-deductible gift in the current year and also provides the ability to dole out those funds to charities over multiple years.
  • Qualified Charitable Distributions (QCDs) are another option for those over 70.5 and especially for those who don’t typically itemize on their tax returns.

Last year, individuals who did not itemize their deductions could take a deduction of up to $300 ($600 for joint filers). This opportunity is currently not available for tax year 2022 however there is some speculation that Congress may make this available for 2022 via an extenders package that would be passed in December 2022. Also, some states allow for a charitable contribution deduction even if you don’t itemize on your federal return (for example, Colorado allows for a charitable deduction when total annual donations exceed $500). It is still worth tracking your charitable contributions for 2022 even if you don’t itemize deductions on your federal tax return.

Education expense planning

If you are paying college expenses, you may want to consider before year end if you will qualify for the American Opportunity Tax Credit (AOTC).   This is a federal tax credit available for the first four years of higher education.  It is a 100% tax credit for the first $2,000 of qualifying college expenses, and an additional 25% credit on the next $2,000 of expenses, for a maximum credit of $2,500.  The student must be enrolled at least half-time in a degree program.

If you file married filing jointly, your ability to claim the AOTC completely phases out once your modified adjusted gross income reaches $160,000.  For taxpayers who file, single, head of household or qualifying widow/er, it phases out at $90,000.  Taxpayers who file married filing separately are not eligible to claim the AOTC.

College expenses paid with funds from 529 plans do not qualify for the AOTC.   If you are eligible to claim the AOTC, you will want to factor it in when determining how to fund college expenses (via 529 savings, personal funds, student loan, grandparent gifts, etc.).

Estate and Gift tax planning

Here are some estate and gift tax planning items to consider before year end.

  • Make use of annual exclusion gifts.  Generally, you are able to give up to $16,000 per donee and $32,000 per married couple without having a gift tax return filing requirement.
  • Capitalize on the unlimited gift exemption for direct payment of tuition and medical expenses. (Payments made directly to educational institutions and medical providers are not subject to the $16,000 annual gift limitation).
  • Consider gifting to a 529 plan by year-end if saving for a child’s or grandchild’s education. Many states offer tax deductions for residents contributing to their state programs.
  • Consider gifting up to 5 years of the annual exclusion amount to an individual’s 529 plan and filing a gift tax return, electing to treat it as if it were made evenly over a 5-year period.

If you need help determining whether a tax planning strategy is right for your finances, please reach out to me.

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