2022 Year-End Tax Planning Reminders

As we approach the end of the year, there is still time to take advantage of tax-saving opportunities. This article outlines a few things to investigate before December 31. We recommend you consult your professional advisors before implementing any strategy to ensure alignment with your personal circumstances.

Employer Retirement Plan Contributions

Now is the time to see if you are on pace to max out your retirement contributions for the year. If not, consider changing how much you contribute or if your plan allows — whether it’s a 401(k), 403(b), or TSP. In addition, consider putting most or all of any bonus you receive into the plan. The maximum deferral for 2022 is $20,500 for those under age 50 and $27,000 for those age 50+.

Roth Conversions

Once you have a sense of your taxable income for the year, explore whether a Roth conversion makes sense. When you convert some of your traditional pre-tax IRA funds to after-tax Roth IRA accounts, you will pay taxes on the amount you convert, but all future gains and qualified withdrawals will be tax-free.

Education Planning

If applicable, maximize deductible contributions to 529 plans. Each state has different tax incentives and rules for its 529 plans, so it is important to review plan-specific details to determine deductibility.

Health Savings Accounts (HSAs)

If applicable, maximize deductible contributions to a health savings account or HSA. These accounts are available to participants enrolled in a high-deductible health insurance plan. The maximum contribution in 2022 is $3,650 for a single person and $7,300 for a family. Note that this includes any employer contributions made to the plan on your behalf.

Charitable Contributions

Now is a great time to consider making charitable contributions. Of course, the tax deduction is nothing compared to the feeling you get from helping an organization fund its mission. In addition, unless you bundle your donations or give through a donor-advised fund, you may not get a deduction at all, considering the 2022 standard deduction is $25,900 for married couples that file jointly ($12,950 for single filers). Talk with your advisor and CPA about your charitable intent to determine the most beneficial way to donate your assets.

Required Minimum Distributions (RMDs)

The deadline to take your 2021 RMD is December 31. There is a steep penalty equal to 50% of the undistributed amount if you don’t meet the deadline. Make sure you have taken your entire RMD before the end of the year to avoid issues.

Qualified Charitable Distribution (QCD)

A qualified charitable distribution or QCD allows individuals aged 70 ½ or older to donate up to $100,000 to one or more charities directly from a taxable IRA instead of taking their required minimum distribution (RMD). As a result, donors may avoid being pushed into higher income tax brackets and prevent phaseouts of other tax deductions, though there are some other limitations.

Gifting

Following the idea of charitable giving, consider making gifts to family members to help reduce the size of your estate. Per IRS rules, every taxpayer can gift up to $16,000 per person per year to any number of beneficiaries (family or nonfamily) without paying gift tax or using up any available exclusion during one’s lifetime.

Estate Planning

Taxes are imposed on transfers, by gift or at death above the applicable exclusion amount, which is indexed for inflation ($12.06 million in 2022). With proper planning, it is possible for a married couple to use two exclusion amounts. For example, an executor can make a “portability” election to transfer any unused exclusion from a deceased spouse to a surviving spouse. The estate tax rate is 40% for any amount exceeding $12.06 million (or $24.12 for married couples). Consult your financial, tax, and legal advisors to determine the appropriate strategy for your circumstances.