Tax Moves to Consider in Light of 2022’s Economic Challenges

Despite the roller coaster ride that has been 2022, there is still time to reduce this year’s tax burden. By planning and acting on the following tax moves now, you can stay ahead of the curve.

Consider a Roth IRA conversion or “Backdoor Roth”

Contribution limits apply to Roth IRAs based on modified adjusted gross income, which start kicking in when single filers earn over $129,000 and married filers make over $204,000.[i]

However, you can convert a traditional IRA to a Roth IRA by paying current income tax rates on the amount converted.[ii] Since this conversion can be done regardless of adjusted gross income, it is known as a “Backdoor Roth.” The major perk of this strategy is that in the future, all withdrawals from your Roth (that meet the appropriate withdrawal requirements) are tax-free. By contrast, withdrawals from your traditional IRA are fully taxed as income.

Further, if stocks and bonds are depressed you may indeed be converting at an opportune time since the future appreciation is tax free.

Revisit Your Estate Tax Exemptions—and Gifts

If you’re on track to reach the lifetime $12,060,000 per-person gift tax exemption in 2022,[iii] now’s a great time to use it. Even if Congress doesn’t lower the limit next year, the exemption expires at the end of 2025 anyway.

You can also transfer annual tax-free gifts to your loved ones. Typically, you can give up to $16,000 per person, per year with no tax consequences.[iv] A married couple can gift their married adult child and spouse a combined $64,000 a year, tax free.[v] In addition, one can also pay tuition directly to a school/university as well as pay direct medical expenses, which are excluded from annual and lifetime gift thresholds.[vi]

Gifts of Depressed Assets

Recent depressed asset values provide a unique opportunity to transfer substantial wealth now which will benefit family members for several future generations. Using a portion of your federal exemption to transfer current low asset values should be viewed as an opportunity. Depressed stock and business values can be considered a “natural discount” taken alone. When considered in combination with valuation discounts available from various wealth transfer strategies the “double” discount makes this a particularly attractive time to make gifts with property that is expected to appreciate during a market recovery.[vii]

Maximize Charitable Contributions

The IRS lets you claim a standard deduction or itemize deductions when filing your tax return. For 2022, the standard deduction for an individual is $12,950, and a married couple who files jointly can deduct $25,900.[viii]

However, if your allowable deductions, including charitable giving, are greater than these limits, you can realize a greater tax benefit by itemizing deductions. A bump in your 2022 charitable donation could put you above the threshold to itemize and give you a bigger tax break.

Donor Advised Funds

A donor-advised fund is essentially an investment account for charitable contributions. Making contributions of appreciated securities or cash can give you an income-tax deduction while making it easier to support causes or charities for the long-run. Once your contribution is made, you can take an immediate income-tax deduction. That’s why this is a useful strategy to consider before the end of the year. Your donation grows, tax-free, until you’re ready to contribute it to a cause. You can support any qualifying public charity with your funds.[ix]

Harvest Tax Losses

Given the extent of the market volatility in 2022, you may be straining to find some good news. Tax loss selling, also known as tax loss harvesting, can be used to reduce taxes on other capital gains. You can sell stocks and mutual funds to realize losses and then use those losses to offset any taxable capital gains you have realized during the year. Capital losses offset capital gains dollar for dollar and if your losses are more than your gains, you can use up to $3,000 of excess loss to wipe out other income.[x]

If you have more than $3,000 in excess loss, it can be carried over year to year for as long as you live. It can be tempting to move in and out of positions, but the wash-sale rule doesn’t permit you to write off losses if you sell and rebuy the same or similar security within 30 days.[xi]

The Remote Workplace

Since the coronavirus pandemic began nearly two years ago, an unprecedented number of people have started working from home. Remote work can trigger tax implications for both business and their employees that most people fail to think about. One of those implications is that you might be subject to double taxation if it is unclear as to where you actually reside and multiple states are vying for the right to tax your income.

To avoid these tax issues, it’s good to notify both your employer about your whereabouts. You should also consider documenting the dates of your travel, or if applicable, your move. If the move is a permanent one, take steps to establish your state of residence like changing your mailing address and getting a new driver’s license as soon as possible.[xii]

Conclusion

The right year-end tax moves for 2022 vary widely based on your personal financial situation and any planning moves you’ve already executed throughout the year.

These are just a few strategies that may be applicable to you—for specific ideas, it’s important to work with us and your accountant to figure out the most appropriate way forward. We’re here to help you quarterback that process and strategize specifics. While you’re likely to have heard from us already about year-end planning, please don’t hesitate to reach out if you have any outstanding questions about your tax situation.

Thank you for your ongoing support and trust throughout the year and we look forward to continuing working closely together with you in 2023.

Your Friends at JSF

The information expressed herein are those of JSF Financial, LLC, it does not necessarily reflect the views of NewEdge Securities, Inc. Neither JSF Financial LLC nor NewEdge Securities, Inc. gives tax or legal advice. All opinions are subject to change without notice. Neither the information provided, nor any opinion expressed constitutes a solicitation or recommendation for the purchase, sale or holding of any security. Investing involves risk, including possible loss of principal. Indexes are unmanaged and cannot be invested in directly.

Historical data shown represents past performance and does not guarantee comparable future results. The information and statistical data contained herein were obtained from sources believed to be reliable but in no way are guaranteed by JSF Financial, LLC or NewEdge Securities, Inc. as to accuracy or completeness. The information provided is not intended to be a complete analysis of every material fact respecting any strategy. The examples presented do not take into consideration commissions, tax implications, or other transactions costs, which may significantly affect the economic consequences of a given strategy. Diversification does not ensure a profit or guarantee against loss. Carefully consider the investment objectives, risks, charges and expenses of the trades referenced in this material before investing. Consult your own tax adviser prior to engaging in any transaction.

Asset Allocation and Diversification do not guarantee a profit or protect against a loss.

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[i] https://www.irs.gov/retirement-plans/plan-participant-employee/amount-of-roth-ira-contributions-that-you-can-make-for-2022

[ii] https://www.fidelity.com/tax-information/tax-topics/roth-conversion

[iii] https://www.irs.gov/businesses/small-businesses-self-employed/whats-new-estate-and-gift-tax

[iv] https://turbotax.intuit.com/tax-tips/estates/the-gift-tax/L1sFpFeXV

[v] https://www.elderlawanswers.com/will-you-owe-a-gift-tax-this-year-6069

[vi] https://www.actec.org/estate-planning/gift-tax-medical-expenses-tuition-payments/

[vii] https://www.hollandhart.com/depressed-asset-values-provide-unique-opportunity-for-wealth-transfer-planning

[viii] https://www.irs.gov/newsroom/irs-provides-tax-inflation-adjustments-for-tax-year-2022

[ix] https://www.fidelitycharitable.org/guidance/philanthropy/what-is-a-donor-advised-fund.html

[x] https://www.fidelity.com/viewpoints/personal-finance/tax-loss-harvesting

[xi] https://www.investopedia.com/terms/w/washsalerule.asp

[xii] https://www.thezebra.com/resources/personal-finance/double-taxation-remote-work/