2022 Year-End Tax Planning for Individuals

While 2022 started out with some uncertainty about potential tax law changes, very few of the proposed policies that may have impacted high income taxpayers were enacted.

The Inflation Reduction Act signed into law in August spared virtually all measures that would have raised taxes on individual taxpayers and closely held businesses. There are a few remaining unresolved tax issues that could be considered in a post-election session; however, most of them are geared towards businesses. This means that as we approach year-end, you can plan with greater certainty ways to minimize your 2022 tax bill.

Following are the key tax changes and strategies to consider before year-end.

Timing of Gains and Losses

2022 has been a rollercoaster ride for investors. Between stock market volatility, interest rate hikes, rising inflation, and a potential recession on the horizon, it’s important to manage the timing of gains and losses before year-end.

With the S&P down more than 20% this year, you may be able to reduce your tax liability by harvesting unrealized losses within your portfolio. Further, there could be a rare opportunity to harvest declining fixed-income assets, such as bonds, as well. The lingering volatility may offer investors a silver lining to sell investments in taxable accounts that have losses and then use this loss to offset either already-realized gains, or embedded gains to realize now or in the future.

In 2022, the IRS allows taxpayers to deduct a maximum net capital loss up to $3,000 per tax year. Any unused losses can be rolled over into subsequent tax years to offset future gains, and the losses never expire. Should you want to buy the asset back, be careful not to violate the “wash sale rule,” a rule preventing investors from taking a loss on an asset purchased 30 days before or after the loss trade date. To keep your position, you could consider buying the same asset and then selling the original loss position 30 days later. You would need to do this no later than November 29 to recognize the loss in 2022.

Any realized gains in 2022 are subject to continued low long-term capital gains rates of 0%, 15%, and 20%, based on taxable income. Short-term gains are taxed as ordinary income. To manage your gains, you could consider contributing to tax-advantaged retirement plan accounts, investing in a Qualified Opportunity Fund, or establishing a charitable remainder trust account to defer and minimize taxes.

Tax-Friendly Pandemic Provisions Set to Expire

Many of the pandemic’s big tax breaks were temporary and expired on Dec. 31, 2021. These include the popular child tax credit, child and dependent care tax credit, and the earned income tax credit. However, there’s discussion that the child tax credit could become part of a tax extender bill during a post-election session.

If the child tax credit is not extended in 2022, it will revert back to $2,000 per child from $3,600 for children 5 years old and younger and $3,000 for children between 6 and 17 years of age (excluding those 17 years old and older).

In addition, the child and dependent care credit decreases in 2022 from 50% to 35% for up to $3,000 for one child or dependent and up to $6,000 for more than one, and the full amount now only applies to families making less than $15,000 instead of $125,000 in 2021.

Energy-Related Tax Credits

The Inflation Reduction Act contained several tax provisions to incentivize renewable energy usage to reduce carbon footprints. While many of these provisions will affect 2023 returns, some credits for up to $7,500 still apply in 2022. High income earners should consider using the EV tax credit this year, as there are no income ceilings to qualify. Starting in 2023, the credits will be capped at $150,000 (filing single) and $300,000 (married filing jointly).

For taxpayers who purchased an electric vehicle after August 16, 2022 and before Dec. 31, 2022, final assembly of the vehicle must be completed in the U.S. to qualify. The credit begins to phase out when at least 200,000 qualifying vehicles manufactured by each company have been sold, Tesla and General Motors being the only two companies to reach that milestone, to date.

In addition to EV credits, the Act also includes a number of revived and modified energy-related tax credits for homeowners. For 2022, taxpayers may be eligible to claim a 10% credit of the costs of installing certain energy-efficient home improvements (lifetime limits apply); however, if you can wait to make home improvements, the Act greatly expands the credit in 2023 to cover 30% of the cost of eligible systems, equipment, and materials. It also replaces lifetime limits with annual limits, so if you can space out your qualifying home projects, you may be able to claim the maximum amount each year.

Charitable Giving

As you consider your 2022 year-end giving strategy, it’s important to know that some of the charitable contribution tax deductions implemented in 2020 and 2021 are expired and have not been extended into 2022. That means the deduction limit for a cash gift to a public charity is now back to 60% of adjusted gross income (AGI), and the $300 (filing single) and $600 (married filing jointly) above-the-line charitable deductions is no longer available.

Making a qualified charitable contribution is still an effective way to reduce your tax liability if you expect to realize gains in 2022 and 2023. You may also consider “bunching” your donations through a donor-advised fund to maximize tax savings in the contributing year.

Estate and Gift Tax Exemptions

Recent legislation did not repeal the Tax Cuts and Jobs Act (TCJA) increased estate, gift, and generation-skipping transfer taxes. Instead, the exclusion amounts continue to increase. The 2022 lifetime estate and gift tax exemption amount is $12.06 million adjusted for inflation, and starting in 2023, taxpayers can transfer up to $12.92 million without triggering a federal estate-tax bill.

The annual gift tax exclusion also increased from $15,000 in 2021 to $16,000 in 2022. The annual limit will go up to $17,000 in 2023.

Unless the TCJA is extended by Congress, we’re now past the halfway point until the increased exclusion amounts sunset, which is expected after Dec. 31, 2025. It’s important not to wait until the last minute to plan your estate, as tax law can change at any time. Be sure to take advantage of these high exclusion amounts to preserve your wealth.

Retirement Planning

As always, maximizing your retirement contributions will not only reduce your overall tax burden this year and keep money in your pocket, but it will also defer taxes until later in life when you will most likely be in a lower tax bracket. Be sure to leverage employer contributions or matching opportunities to help your retirement account grow faster.

Depending on your situation, some may consider converting a traditional IRA into a Roth IRA this year. Oftentimes when portfolios are down or when young professionals are just starting out, it may be advantageous to do the conversion when income is lower that year, as you will be taxed on the dollar amount converted. Assets will then accumulate tax-free in the Roth account and allow for tax-free distributions when income tax rates may be higher in the future.

Next Steps

Contact me at cknepler@bpw.com or (805) 963-7811 with any questions and to implement an effective year-end tax planning strategy for your situation. It can help preserve your wealth and prepare you for the upcoming tax season.