Individual Tax Planning: 6 Steps to take before year-end

As the year ends, taking action on potential ways to lower your individual federal tax bill for the year is important. While previous years have been rife with change,  the tax code has seen minimal edits this year. Keep reading for steps to take before the end of the year and our outlook on the tax code for the following year.  

Look for Ways to Defer Taxable Income 

When inflation is high, it may make sense to defer taxable income. This includes accelerating deductions. Remember that you may need to increase or adjust 2023 estimated tax payments to cover any income or gains deferred to 2023. One way to offset this is by basing the 2023 tax payments on the lesser of: 

  1. Your 2022 tax liability (if your adjusted gross income exceeds $150,000 or $75,000 for married filing separate, use 110% of the 2022 tax liability as your baseline) 
  2. Ninety percent of your 2023 tax.  

Using the 2022 tax liability to calculate your tax bill for 2023 can allow you to postpone tax on deferred gains or large income amounts recognized in 2023 to the tax filing deadline in 2024. 

Consider Selling Investment Assets 

Look at your investment portfolio to see if selling before year-end is to your advantage. If you have recognized capital losses this year or have carryovers from previous years, you can use those losses to shelter 2022 capital gains. In short, your losses can reduce the tax liability on capital gains taxes. This makes the most sense for short-term capital gains – or money earned on investments held for one year or less – as tax rates are higher for short-term investments.  

On the other hand, selling some investments that have decreased in value this year could be the right move. They could provide the capital losses needed to shelter the gains mentioned above. Or, if you end the year with a net capital loss, you can deduct up to $3,000 (or $1,500 if married filing separately) from your ordinary income in 2022 and carry forward the remaining amount to the following years until the full loss is realized on your tax filings. Some additional rules need to be considered, so speak with your trusted tax and financial advisors before making any major tax-related moves. 

Bunch Itemized Deductions to Maximize Their Value 

When calculating tax liability, individuals should use either the standard deduction ($25,900 for joint filers, $19,400 for head of household, or $12,950 for single filers) or their itemized deductions, whichever is greater.  

If you find yourself on the cusp of being able to use itemized deductions, bunch together your itemized deductions in 2022. This could mean paying for items now that you would have paid for in 2023. Doing this maximizes your tax benefit for 2022 while allowing you to use the standard deduction in 2023, which you probably would have used anyways. Itemizing every other year often outweighs taking the standard deduction every year.  

So, what can you pay for now? Items that can be itemized include mortgage interest, charitable contributions, medical expenses, and taxes. Consider increasing charitable contributions for the year, paying real property taxes now instead of carrying over into 2023, when possible, have elective procedures, routine physicals, and dental work you’ve been putting off completed before year-end. If you owe Alternative Minimum Tax (AMT) this year, it may be more advantageous to pay your state and local taxes in 2023, if possible. 

Make Your Charitable Giving Plans 

There are several ways to maximize your charitable giving and receive annual tax benefits.  

    • Donor-advised funds: Donors can contribute to a specific public charity or community foundation that uses those assets to create a fund for grant requests to other charities. Donors are even allowed to suggest which grants are selected to be honored. Tax deductions for charitable giving are taken in the year the money was contributed to the fund – even if the money hasn’t been paid out to other charities yet. 
    • Donate appreciated assets: If you have held appreciated assets for more than one year, you can deduct the total fair market value of the asset. If you had sold the asset and donated the same amount, you would be required to pay taxes on the sale of the asset.  
    • Qualified charitable distribution: Using a qualified charitable distribution in place of your required minimum distribution (RMD) keeps you from including the RMD in your income calculations.  

Evaluate Intrafamily Loans 

Review any intrafamily loans to ensure the interest rate is on par with the Applicable Federal Rate (AFR) and other IRS documentation requirements. Intrafamily loans are a way for those interested in assisting family members in transferring assets tax-efficiently. Keep in mind that the loan must come with an interest charge that is, at minimum, the Applicable Federal Rate (AFR) published by the IRS every month. This rate is typically lower than commercial lenders, which saves the borrower money on interest expenses while saving you, the lender, on potential financial liabilities of a taxable gift.  

Take Advantage of the Annual Gift Tax Exclusion 

The estate, gift, and generation-skipping transfer tax exclusion currently sits around $12.06 million (or $24.12 million for married couples). That number will decrease to $5 million ($10 million for married couples) in the 2026 tax year. Many estates may find themselves no longer fully excluded from taxes after 2025 and may want to consider transferring some of the funds now through annual exclusion gifts. The annual gift tax exclusion allows up to $16,000 to be gifted per donor in 2022, with no limit on the number of donors. This can lower the potential future tax liability from transferring your estate. 

Outlook for 2023 and beyond 

While we can’t ultimately rule out any changes to the federal individual income tax rates, we don’t see an increase or tax legislation having a major effect on tax planning soon. Even so, reviewing your individual tax plan with our knowledgeable tax professionals to discuss the introduction of the Massachusetts Millionaire’s Tax is best. To set up a meeting, or discuss any 2022 tax moves, reach out to us today.