Terry’s Columns Year-End Tax Planning

Year-End Tax Planning

By Terry Savage on November 27, 2022

The steps you take in the month of December could save you tax dollars next April. Now is the time to take the steps that can reduce your tax bill for 2022, and lay the groundwork for a financially smart New Year.

Taxes and Deductions: For 2022, the “standard deduction” jumps to $12,950 for a single return and $$25,900 for married couples filing jointly, and $19,400 for heads of household. That higher standard deduction discourages itemized filing for things things like charitable contributions and property taxes, as well as state and local income taxes, which have a $10,000 limit. For married couples filing filing jointly with one spouse is 65 or older, the standard deduction rises by $1350.

Tax Brackets: If you think you’ll be in a lower tax bracket next year, you might see if you can delay receiving some income until 2023. But bunching deductions such as medical expenses to above 7-1/2% of adjusted gross income could give you a break on your taxes this year.
The good news is that for 2023 the IRS is adjusting tax brackets for 2023 by 7% to accommodate inflation. For example, if your income was $85,000 in 2022, you were in the 22% tax bracket. But next year that same income puts you only in the 12% tax bracket! (Of course, you’ll have to earn more to keep up with inflation!)

Tax Credits: While there’s not much wiggle room on deductions for the year, but there are some tax credits you can take to lower the tax burden. The child tax credit is refundable, and can be worth $3600 for each child under 7, and $3000 for children aged 7 to 17, for those earning under $75,000 on a single return, or $150,000 on a joint return.

If you purchased an electric car this year, subject to some restrictions on where it was produced, you might be entitled to a credit of between $2500 and $7500. Note also the Lifetime Learning Credit which, depending on income, might be available to college and grad students.

Tax Considerations for Stock Sales: If you own stocks outside your retirement plan, you might consider taking some losses (plenty of those!) and offsetting those loses by sell stocks that still have profits. Capital gains tax rates for assets held for more than one year, make profit-taking attractive. If your income is less than $41,695 (single) or $83,350 (married filing jointly) you pay zero capital gains! And you pay only 15% on capital gains if your 2022 income is above that level but under $459,750 on a single return.

Any excess losses can be deducted up to $3,000 from your ordinary income, and leftover losses can be applied to future income at $3,000 a year. The last day to establish a capital loss is Friday, December 20th this year.

Beware of “wash sales.” If you repurchase the stock you sold to establish a loss within 30 days – either side of your sale – the loss deduction will be disallowed. Instead, consider purchasing an ETF or a similar –but not identical – security to maintain your exposure. You may not use an option to hold your position and avoid the wash sale rule.

For specific details about capital gains tax brackets and to calculate the impact on your return, use this link.

Mutual Fund Taxes: For mutual funds held outside retirement account, you may still pay taxes even though you never sold a share, and actually have a loss on your investment! In December, funds distribute notices of taxable gains on shares they sold <> the fund, and even on some dividends. As a shareholder, you’re liable to pay taxes on those amounts. (And beware of buying fund shares just before a taxable distribution is declared!)

Roth Conversions: This month might be the time to convert your traditional IRA to a ROTH IRA. The value of your fund shares is lower, so your tax bill on conversion will be lower. But you must have money <> your IRA to make this transaction work efficiently. And beware that adding the amount of the conversion onto your tax bill could result in a higher Medicare Part B premium next year.

Charitable Contributions: Charitable giving continues to be generous in recent years, even though far fewer people itemize. But anyone 70.5 years of age or older can give up to $100,000 as a tax-free gift, in the form of a Qualified Charitable Deduction (QCD), from their traditional IRA account. Plus, if you’re over age 72 and subject to Required Minimum Distributions (RMDs), these gifts can count against the amount you’re required to withdraw – essentially making this a pre-tax contribution.

Speaking of RMDs, don’t wait until the last minute to take your withdrawals. Retirement plan custodians will be busy in late December, and the failure to take an RMD is a steep 50% of the amount required.

Don’t procrastinate. In all of these issues, time is money. And that’s The Savage Truth.



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