Year-end Planning Topics to Discuss with Your Tax Advisor to Maximize Savings

by , | Dec 6, 2022 | Articles, Insight-Post, Community Circle

As year-end approaches, it is a good time to review your 2022 financial activity, look ahead to 2023 and consider options available to minimize your tax liability. Many of the simplest and most effective planning strategies require action before we ring in the new year, so set aside a few minutes to think about these potentially money-saving techniques.

Review Your Year-to-date Capital Gains and Stock Holdings

Consider selling interests that are currently in a loss position to offset 2022 recognized capitals gains. It is important to be mindful of the wash sale rules if you still wish to hold the investments after triggering losses: You need to wait at least 30 days before reinvesting.

Alternatively, if you have recognized net losses, you may want to recognize gain before the end of the year. Remember, net capital losses are limited to $3,000 per year. You can repurchase these investments and carry the higher tax basis into future years.

Accelerate Philanthropic Giving

The charitably inclined should review multi-year commitments and think about planned gifts for 2023. Depending on your overall financial situation it may be worth making these gifts before the end of the year to accelerate the deduction into 2022. Note, there is a 60% of adjusted gross income (AGI) ceiling on cash contributions to public charities (30% of AGI for private foundations). Contributions of appreciated property may allow you to avoid tax on the gain (while simultaneously creating a deduction at fair market value) but be aware of the substantiation requirements. A qualified appraisal may be necessary.

Please consult the charitable organization before making large, unexpected contributions to ensure there are no unintended consequences to their budgeting process.

Maximize Retirement Savings

If you have not already, maximize your tax efficient retirement savings before the new year. Employees should consider additional 401(k) contributions (especially if you will receive a bonus before year-end). The 401(k) contribution limits for 2022 are $20,500.

IRA contributions are limited to the lesser of your taxable compensation or $6,000; Simplified Employee Pension Plans (SEP-IRA) contributions are limited to the lesser of 25% of the employee’s compensation or $61,000. Note that IRA contributions can be made up to April 18, 2023, and SEP contributions can be made up to the due date of the employer’s tax return (including extensions).

Further, additional catch-up contributions can be made for taxpayers aged 50 or older.

Consider Timing of Income and Deductions

Cash basis taxpayers may be able to accelerate or pre-pay expenses that would normally be paid and deducted in 2023. Self-employed individuals could have some flexibility by delaying billing into January.

Before taking steps to shift income or deductions across tax years, please make sure you are considering possible limitations (the $10,000 state and local tax ceiling for individuals, passive activity loss disallowance, etc.). Do not allow tax planning considerations to control business decisions — some tax-favorable moves won’t make sense from a business or cash flow perspective.

If you operate or are invested in a partnership or S-corporation that generates taxable income, ask your tax advisor about electing to pay state taxes at the entity level. This can minimize the effect of the $10,000 limit on your personal return.

Estate and Gift Planning

Affluent taxpayers should review estate and gift tax strategies to maximize tax-free distribution of wealth. Take advantage of the annual gift exclusions ($16,000 per spouse, per recipient in 2022 — married couples can effectively gift $64,000 to their married children, for example) and consider use of the $12.06 million lifetime exemption. Note that education and medical expenses can be paid on behalf of family and friends, tax-free and without regard to annual or lifetime limits, provided payments are made directly to the institutions.

As always, it is recommended that you consult your tax advisor before taking any action on tax planning. Every taxpayer is unique and depending on your situation these options may not be available to you or may be ineffective.

This article was originally posted on the Houston Business Journal website.

Contact us if you’d like more information or need help with your tax planning.

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