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Tax Planning Ideas

Financial by Angela Kennedy Lee , CPA, PFS™, CEP®, Director of Tax Planning
November 16, 2022

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Although there haven’t been many significant legislative changes that impact 2022 taxes, year-end is always a good time to evaluate your current tax situation, with an eye toward future changes. There are several tax planning opportunities you may wish to discuss with your tax advisor.

Year-end is always a good time to evaluate your current tax situation, with an eye toward future changes.

Tax Loss Harvesting 

Due to stock market volatility in 2022, you may hold securities that have declined in value.  This may provide an opportunity to realize those losses, which can be used to offset current or future capital gains and up to $3,000 of ordinary income annually.

GHP Investment Advisors actively reviews our clients’ accounts to harvest capital losses where appropriate.  Note that tax loss harvesting does not mean removing funds from the stock market entirely; proceeds from loss-generating sales are re-invested into a similar asset class.

Compare Itemized Deduction and Standard Deduction 

Each year, you may deduct the larger of your itemized deductions (taxes, mortgage interest, charitable contributions, etc.) or the appropriate standard deduction based on your age and filing status. If the total of your itemized deductions is close to the standard deduction amount, you may consider bunching itemized deductions into one year and then taking the standard deduction the next year. One way of doing this is to make your charitable contributions in the years that you plan to itemize rather than giving equally each year.

Give Strategically to Charity 

For taxpayers who itemize their deductions, there may be an advantage to donating appreciated stock to charity. The value of the donation for the tax deduction is based on the fair market value of the donated shares. For stocks with a low tax basis, this technique allows the taxpayer to not only have the advantage of a larger deduction but also to avoid capital gains tax.

Taxpayers may also want to consider making donations to a donor advised fund. This technique allows you to contribute cash or appreciated securities to a charitable fund and receive a current year tax deduction for the donation. The transfer to the donor advised fund is an irrevocable donation for charitable purposes; you as the donor may direct the fund’s holdings to be transferred to qualified charities of your choice, either in the current year or in future years.

If you have an IRA and are taking Required Minimum Distributions (RMDs), you may want to consider making a charitable donation directly from your IRA. This technique, called a Qualified Charitable Distribution (QCD), allows for all or a portion of your RMD (up to $100,000) to be transferred directly to a qualified charity. Rather than reporting the income from the IRA withdrawal and a subsequent deduction for a contribution to charity, the QCD is excluded from your income altogether. In addition to the income tax benefit, you also reduce your modified adjusted gross income used for determining Medicare premiums.

Make Your Retirement Contributions

Every year, you should think about what retirement contributions you may be eligible to make. Take advantage of deferrals offered through your employer’s 401(k) plan. If you are self-employed, consider whether an IRA, SEP IRA, or individual 401(k) is an option for your retirement funding. You may also be eligible to make contributions to an IRA or Roth IRA.

Take Advantage of Low Tax Brackets

It is always a good idea to review your expected tax bracket and think about tax planning opportunities. If you are expecting to be in a lower tax bracket in the current year, you might consider taking an IRA distribution or converting funds from your traditional IRA to a Roth IRA. On the other hand, if you think you’ll be in a lower tax bracket next year, you should consider deferring income until 2023 where possible.

Max Out Your Gifts

You and your spouse are each allowed to gift up to $16,000 per recipient annually, without using any of your lifetime gift and estate exemption. In addition to the $16,000 cap, you may also make health care and education payments directly to the provider.

Look Ahead to 2023 Changes

Due to historically high inflation levels, the IRS announced significant increases to a number of tax thresholds and limitations, beginning in 2023:

Retirees who are receiving Social Security benefits will receive a cost-of-living adjustment of 8.7%.

The Bottom Line

Consult with your tax professional if you think the above opportunities or others may apply to you. For GHPIA clients who would like more information, our Financial Concierge team can help coordinate a discussion with your tax professional. 

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