8 Practical Year-End Tax Tactics
Eight Steps to consider
As 2022 comes to a close, there are multiple pertinent reminders and important steps for taxpayers to consider if they wish to minimize their tax burden and retain more of their earnings; several are perennial strategies and some are more specific to this year.
The big picture for tax efficiency is to postpone income until at least January of next year and accelerate deductions into 2022. Deductions in 2022 will save you money now, and income deferred into January means taxes can be paid a year later with deflated (cheaper) dollars—which is especially relevant in today’s high-inflation environment.
1. Think ahead
Speak with a knowledgeable wealth manager, financial planner, or tax advisor regarding how best to optimize your tax situation for 2022 and beyond. Please try not to wait till the last minute. The more multifaceted your situation or the more wealth you have, the more advisable this is. Rules can be complex and arcane and it is best not to tackle them solo. Even Warren Buffet gets help here. As a multifamily office, we try to build tax planning and optimization into investment and estate strategies as soon as possible and then update as necessary.
2. Harvest losses
Where possible, tax-loss harvest stocks, bonds, crypto, and other investments in taxable accounts; i.e., sell investments that are at a loss in order to use those losses against current or future taxes. In a year like 2022, where many stocks, bonds, cryptocurrencies, and funds have been pummeled, this is an extremely beneficial silver lining. Capital losses are an especially valuable reserve to build up for those that have sheltered capital gains in opportunity zones and will have those taxes come due after December 31, 2026. Investment securities (like stocks, bonds, ETFs, and mutual funds) are subject to a 30-day wash rule where you cannot sell and buy the same investment within 30 calendar days and still declare the loss; however you are allowed to buy a different investment if you want to maintain exposure; e.g., a mutual fund can usually be replaced with an ETF. If you are already invested in a custom equity index with automatic tax loss harvesting, much of this will already have been done for you.
- Note: Cryptocurrencies are technically not subject to the 30-day wash rule because they are not securities, but legislators may close this loophole soon
- Also note: Tax-loss harvesting does not work in IRAs, 401(k)s or other tax-deferred accounts
Additionally, Susan Lash, CPA, Running Point’s tax partner, advises, “If you are an employee who received stock option grants during the 2022 tax year, or have existing options, work with a professional advisor to develop a strategy regarding the exercise, holding and selling of the stock. Each step has tax implications that you need to understand to make sound decisions.”
3. Apply finesse
Finesse your standard deductions. For 2022, standard deduction allowances are $12,950 for single people and married individuals filing separate returns, $19,400 for people who use head-of-household filing status, and $25,900 for married couples filing jointly. If total itemizable deductions for this year will be close to your allowance limit, consider additional expenditures between now and year-end to surpass your standard deduction, thus allowing you to itemize and reduce your 2022 federal income tax bill. Standard deduction allowances will be significantly larger next year, so if there is an expenditure you were going to automatically pay in 2023, consider bunching. In other words, it may make sense to move the payment forward to 2022 if it pushes you over the itemized deduction threshold; examples are to make larger charitable donations this year and smaller ones next year, prepay your January 2023 mortgage payment, prepay state or local income and property taxes (if you are not subject to alternative minimum tax (AMT) or butting against Tax Cuts and Jobs Act limits of $10,000), or accelerate medical expenses if they will exceed 7.5% of your adjusted gross income.
4. Use insurance
It may be too late this year, but for those who have the means and want to plan ahead, private placement life insurance (PPLI) is insurance coupled with a solid tax-deferred strategy that can be powerful for multigenerational planning purposes and transference of wealth.
5. Save tax deferred
If you work, consider either adjusting your 401(k) Plan contributions to max out before year end (at $20,500 for those under 50 or $27,000 for those over 50) or maxing out your IRA contributions (at $6,000 for those under 50 or $7,000 for those over 50) as late as April 17, 2023. If you are over 72 years old, please make sure to take your required minimum distributions so as to avoid penalties.
Susan Lash suggests, “don’t forget about inherited IRA’s, especially recently received ones. The rules changed in 2020 and require a shorter 10-year payout for IRA’s received via inheritance after December 31, 2019. Penalties for failing to take the RMD can add up. Coordination with your financial and/or tax advisor is important to make sure you take required distributions timely, and you plan for the taxes that will be due on the distributed funds (unless the distribution comes from a Roth IRA).”
6. Be philanthropic
Consider charitable contributions to lower your taxes or donating to a donor-advised fund (DAF) and taking the full amount of that against your taxes. If you might gift appreciated securities, analyze whether doing that or selling the securities and donating cash will produce a greater tax benefit (due to a 60% limit for certain tax contributions). Persons 70½ and older can make qualified charitable distributions (QCDs) from their IRAs to qualified charities up to $100,000 per year; you won’t receive a charitable deduction for this, but your gross income calculation will be reduced by some or all of the QCD that is donated.
7. Buy carefully
If you are rebalancing your portfolio and seek to add new funds or mutual funds, you may want to do so after they have gone ex-dividend on any year-end capital gains or special income distributions; nobody wants to increase their tax liability.
8. Leverage depreciation
Small business owner that wants to reduce their taxable profit can consider last-minute capital expenditures, like new or used equipment purchases that are put into service before year-end, and then accelerate bonus depreciation up to 100% against federal taxes (restrictions apply). Bonus depreciation will be reduced by 20% next year and every year after until it disappears in 2027. Sole proprietors may want to consider setting up a SEP IRA or Solo 401(k) and then maximizing contributions in order to minimize taxable net income; some of these contributions can be made after year-end.
“Some of these contributions can be made after the end of the year. Please check with your financial or tax advisor since these rules can be complex,” suggests Lash. “Evaluate gifting and estate planning options. In 2022, a gift of up to $16,000 to each recipient is allowed without reporting or tax requirements. While gifts to family and friends (noncharitable recipients) are not tax deductible, they will reduce your estate. If appreciated property is gifted to a recipient in a lower tax bracket, there can be savings of tax dollars if the recipient sales the property. Don’t forget about 529 plans which allow gifts to the account to grow tax free until the recipient is ready to use the funds in the account for education expenses. Please consult your financial advisors so that you understand how the plans work and the educational costs that may be paid with funds from the plan.”
All of the above considerations are attached to numerous rules and regulations that determine allowances and eligibility. Consulting a professional multifamily office, wealth manager, financial planner, or tax advisor is highly recommended.
Running Point strives to maintain diversified portfolios that balance perceived outlooks with risks while we search for and analyze opportunistic investments. For some with a longer-term view that can take advantage of some illiquidity, private credit funds, specific real estate deals, venture capital, or other bespoke deals may offer unique prospects to achieve goals efficiently and effectively.
Michael Ashley Schulman, CFA
Partner, Chief Investment Officer
“We deliver custom investment solutions, innovations, and unique perspectives to you and your family.”
Disclosure: The opinions expressed are those of Running Point Capital Advisors, LLC (Running Point) and are subject to change without notice. The opinions referenced are as of the date of publication, may be modified due to changes in the market or economic conditions, and may not necessarily come to pass. Forward-looking statements cannot be guaranteed. Running Point is an investment adviser registered with the U.S. Securities and Exchange Commission. Registration does not imply a certain level of skill or training. More information about Running Point’s investment advisory services and fees can be found in its Form ADV Part 2, which is available upon request. RP-22-73