2022 Year End Tax Planning for Individuals

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 You pay tax on the transfer of the money now, but it then grows tax-free and can be withdrawn in retirement tax-free.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.

Information provided on this web site by Cassandra Lenfert, CPA, LLC is intended for reference only. The information contained herein is designed solely to provide guidance to the user, and is not intended to be a substitute for the user seeking personalized professional advice based on specific factual situations. This Site may contain references to certain laws and regulations which may change over time and should be interpreted only in light of particular circumstances. As such, information on this Site does NOT constitute professional accounting, tax or legal advice and should not be interpreted as such.

Although Cassandra Lenfert, CPA, LLC has made every reasonable effort to ensure that the information provided is accurate, we make no warranties, expressed or implied, on the information provided on this Site, or about any other website which you may access through this Site. The user accepts the information as is and assumes all responsibility for the use of such information. We also do not warrant that this Site, various services provided through this Site, and any information, software or other material downloaded from this Site, will be uninterrupted, error-free, omission-free or free of viruses or other harmful components.

Last-Minute Year-End Tax Strategies for Your Stock Portfolio

Here are seven possible tax planning strategies to consider implementing using your taxable brokerage accounts.

When considering using any tax strategy such as selling investments in your portfolio to realize a loss, be sure it makes sense for your bigger financial picture (in this case your portfolio allocation and strategy). “Don’t let the tax tail wag the economic dog.”

Strategy 1

Consider selling portfolio investments that are down before the end of the year. Net capital losses can offset up to $3,000 of the current year’s ordinary income. The unused excess net capital loss can be carried forward to use in subsequent years. 

Strategy 2

Examine your portfolio for stocks you want to unload, and make sales where you offset short-term capital gains subject to a high tax rate, such as 40.8 percent, with long-term capital losses (a rate of up to 23.8 percent). 

Strategy 3

As an individual investor, avoid the wash-sale loss rule. 

Under the wash-sale loss rule, if you sell a stock or other security and then purchase substantially identical stock or securities within 30 days before or after the date of sale, you don’t recognize your loss on that sale. Instead, the code makes you add the loss amount to the basis of your new stock.

If you want to use the loss in 2022, you’ll have to sell the stock and sit on your hands for more than 30 days before repurchasing that stock.

Strategy 4

If you have lots of capital losses or capital loss carryovers and the $3,000 allowance is looking extra tiny, sell additional stocks, rental properties, and other assets to create offsetting capital gains.

If you sell stocks to purge the capital losses, you can immediately repurchase the stock after you sell it—there’s no wash-sale “gain” rule.

Strategy 5

Do you give money to your parents to assist them with their retirement or living expenses? How about children (specifically, children not subject to the kiddie tax)?

If so, consider giving appreciated stock to your parents and your non-kiddie-tax children. Why? If the parents or children are in lower tax brackets than you are, you get a bigger bang for your buck by 

  • gifting them stock, 
  • having them sell the stock, and then
  • having them pay taxes on the stock sale at their lower tax rates.

Strategy 6

If you are going to donate to a charity, consider appreciated stock rather than cash because a donation of appreciated stock gives you more tax benefit.

It works like this: 

  • Benefit 1. You deduct the fair market value of the stock as a charitable donation.
  • Benefit 2. You don’t pay any of the taxes you would have had to pay if you sold the stock.

Example. You bought a publicly traded stock for $1,000, and it’s now worth $11,000. If you give it to a 501(c)(3) charity, the following happens:

  • You get a tax deduction for $11,000. (if you itemize deductions on your federal tax return)
  • You pay no taxes on the $10,000 profit.

Two rules to know:

  1. Your deductions for donating appreciated stocks to 501(c)(3) organizations may not exceed 30 percent of your adjusted gross income.
  1. If your publicly traded stock donation exceeds the 30 percent, no problem. Tax law allows you to carry forward the excess until used, for up to five years.

Strategy 7

If you could sell a publicly traded stock at a loss, do not give that loss-deduction stock to a 501(c)(3) charity. Why? If you sell the stock, you have a tax loss that you can deduct. If you give the stock to a charity, you get no deduction for the loss—in other words, you can just kiss that tax-reducing loss goodbye.

Information provided on this web site by Cassandra Lenfert, CPA, LLC is intended for reference only. The information contained herein is designed solely to provide guidance to the user, and is not intended to be a substitute for the user seeking personalized professional advice based on specific factual situations. This Site may contain references to certain laws and regulations which may change over time and should be interpreted only in light of particular circumstances. As such, information on this Site does NOT constitute professional accounting, tax or legal advice and should not be interpreted as such.

Although Cassandra Lenfert, CPA, LLC has made every reasonable effort to ensure that the information provided is accurate, we make no warranties, expressed or implied, on the information provided on this Site, or about any other website which you may access through this Site. The user accepts the information as is and assumes all responsibility for the use of such information. We also do not warrant that this Site, various services provided through this Site, and any information, software or other material downloaded from this Site, will be uninterrupted, error-free, omission-free or free of viruses or other harmful components.