Year-End Tax and Financial Planning Ideas

Updated November 14th, 2022

2022 for many has been a challenging year in terms of the markets, geopolitical issues abroad, and inflation.  We have been quoted on many of the market-related issues in the media – about the feeling or riding the market “rollercoaster”.  Surprisingly, there has not been much this year in terms of tax reform.  Although many spending bills have been passed (some via reconciliation and some have been bipartisan), much of Biden’s tax agenda has been stalled in the senate due to the 50/50 split and due to the fact that not all democrats are 100% onboard with Biden’s plans.  We always feel it is prudent to be aware of your tax situation.  Before you start thinking about 2023, do not forget about your 2022 year-end tax and financial planning because there are still opportunities under current law to consider, at least from a planning perspective, to take advantage of before year-end.  

Below is a list of ideas that you should consider before year-end:

Do you invest in Crypto currency? 

Under the infrastructure bill that passed in November of 2021, all digital currencies are now classified as specified securities and will be subject to the same reporting by brokers providing services for digital assets.  Reporting will be required after January 1st, 2022.  As there still has been no legislation making Crypto transactions subject to the security wash sale rules, if you have 2022 Crypto gains, consider harvesting any losses in your portfolio before the end of the year to offset those gains.  You can then immediately re-buy the positions while still tax-loss harvesting…at least for 2022.

Do you receive electronic payments using Paypal, Venmo, Zelle, and other payment apps? 

Pay attention to your mail starting in 2022 and look for 1099-K forms.  The threshold for reporting income received to the IRS for goods and services dropped from $20,000 to $600.  Even if the transactions were intended to be personal such as family and friends, but was reported, include the form on your return and work with your tax advisor on how best to make sure you only back taxes on non-personal payments received. 

Have taxable capital gains in 2022? 

Look at Qualified Opportunity Zone investments that could defer your gains until 2026 and any gains realized by your investment will be tax-free after 10 years.  Not all opportunity zone investments are the same.  Make sure the investment is appropriate before investing.  We always say, have the tax benefits be the “icing on the cake” and not the primary reasons for making the investment.

Tax Loss Harvest

Don’t forget to tax loss harvest before year-end by selling securities at a loss to offset any tax gains you realized in 2022.  Don’t worry about realizing too many losses.  Any excess of losses will give you up to a $3,000 loss deduction on your tax return and your excess losses will carry over to future years to offset future gains. 

COVID-19 Distributions

If you took COVID-19 pandemic related penalty free distributions from your retirement accounts under the CARES Act and elected to pay back the distribution over 3 years, you may want to pay back your distribution to avoid potential higher taxes in future years. 

Back-Door Roth Contributions

Back-Door Roth contributions for those who can’t make direct contributions.  If you haven’t already, make your contribution and conversion before the end of the year.  The ability to use this strategy was one of Biden’s proposed eliminated agenda items, however, it did not make it to the final bill that passed.

State and Local Tax Deduction Limits

By now we are all familiar with the $10,000 / year state and local tax deduction limits for itemized deductions.  There has been no change in this amount for 2022.  If you don’t quite get to the full $10,000, don’t forget that you can bunch your deductions into one year to max them out.

Review and Update your Estate Plan

Now is the time to review and update your Estate Plan to maximize your use of your Estate Tax Exemption.  Biden attempted to pass tax reform to eliminate many of the tax benefits, estate strategies, and opportunities that exist currently for wealthy families with taxable estates.  Prior versions of the Build Back Better Plan included dramatic changes to the estate tax regime, however, they did not survive negotiations. The prior law is still in effect.  Under current law, the Lifetime Gift Exemption for 2022 is $12.06 million per taxpayer (it will be going up to almost $13 million in 2023).  Taking advantage of current law can lower or maybe eliminate your projected estate tax obligation.  Act now to avoid any potential future legislation that would try to eliminate many of the tools and strategies available today (the current higher rate will be sunset automatically after December 31, 2025…so it is a great time to start planning).  It is also a great time to consider making year-end annual exclusions gifts to family to reduce your taxable estate (currently $16,000 for 2022, going up to $17,000 in 2023).

Do you have unused Flex Spending Accounts in 2022? 

They are either “use it or lose it” or they can be carried forward to 2023.  Verify with your employer to determine how it works in your plan.

Charitable Giving

If you give to charity, but do not have enough deductions to itemize or you are still thinking about giving to charity, there is a $300/$600 above-the-line deduction for single/joint tax filers for 2022.  Contributions must be to 501(c)(3)s and must be made in cash. 

Working From Home

Working from home?  Many folks were forced to work from home because of COVID-19 and have permanently transitioned to a work-from-home situation.  Don’t forget to keep track of home office expenses for your 2022 tax return.

Consider deferring income into 2023 and accelerating expenses to 2022. 

Inflation has increased many of the 2023 tax-adjusted thresholds and will effectively lower average tax rates in 2023.  If you purchased depreciable assets in 2022, take the accelerated depreciation.  Have a business that is cash basis?  Deposit your receipts after year-end and accelerate payments on expenses into 2022.

Don’t forget to take your 2022 Required Minimum Distributions (RMDs). 

The end of the year presents a unique opportunity to self-reflect about your personal financial planning situation. With factors like tax law changes, life changes, or simply working towards your goals, now is an especially important time to review things. It is always a good time to see if you are on track at your stage in life. Taking what we now know about current legislation and weaving together all of the other areas of your personal finances is one of the key ways we provide value to you as your trusted advisor. Below are some things we would like to help you think through before the year ends.

Income Tax Planning: Make sure you are implementing tax reduction strategies such as maximizing your retirement plan contributions, HSA contributions, FSA distributions, ROTH conversions, tax-loss harvesting your portfolios, making smart tax-efficient charitable contributions, and understanding all the new tax benefits, can all help reduce current and future tax bills. It is also good to review your current year tax projection based on your income and deductions year to date and how that may be different from previous years. We talk about many of these in our year-end tax planning checklist.

Estate Planning: Examine a flowchart of your current estate plan to visualize what would happen to your assets and how the current estate tax law will impact you. For some taxpayers with large taxable estates, the time is now to review your estate plan to maximize the increased estate tax exemption set to expire in 2026!  You want to be sure that your estate planning documents are up to date. In addition to your will, it is important to review your power of attorney, health care documents, trust agreements, and beneficiary designations to assure they all coordinate together according to your desired estate distribution. If you have recently been through a significant life event such as marriage, divorce, or the death of a spouse, this is especially important right now.

Investment Planning: Recently, we have seen increased market volatility and it may feel uncomfortable. Market declines are a natural part of investing and understanding the importance of maintaining your investment discipline during these times is vital. We have always suggested that it is important to “Stress Test” your portfolio to see how it would respond if, for example, there were to be a recession.  We talk about how to navigate recessions in our Recession Survival Guide.  Review your Portfolio Allocation to reaffirm that your current investment allocation and discipline are aligned with your financial plan. Regular portfolio rebalancing and reviews will keep the appropriate amount of risk-balanced in your portfolio. If you are retired and living off your portfolio assets, you need to maintain an appropriate cash reserve to cover expenses.  You do not want to be forced to sell equities in a down market. Check out our Retirement Survival Guide where we discuss this in more detail. It is also a good idea to look at expected distributions from mutual funds. If you recently purchased a mutual fund (or have a fund with a holding-period loss or small gain), you can check with the fund company to see if there will be a large capital gain distribution that will be taxable. If you sell the fund before the distribution, you can avoid the tax hit.  TIP: These occur annually – typically in December.

Charitable Giving: There are many ways to be tax efficient when making charitable gifts. For example, donating appreciated stock would allow for a full deduction of the value and avoid paying capital gains taxes. Maybe you have some high concentrated stock positions with a low-cost basis.  These securities are excellent candidates for charitable contributions.  Plus, you can always buy back the stock if you really insist on owning it.  Another great option is to make direct gifts to charities from your retirement accounts if you are over age 70 ½ known as Qualified Charitable Distributions (QCD).  Doing so will not add income to your return AND qualify towards your required minimum distributions for the year.  You may also want to consider bunching charitable deductions by deferring donations to next year or making your planned donations ahead of time. If the numbers are large enough, you might even consider a private foundation or donor-advised fund for your charitable giving. These contributions need to be locked in by year-end to get a deduction, so now is a great time to start considering your plan.  For more advanced charitable giving, consider Charitable Remainder Trusts that can provide a stream of income while you are alive, but leave the remainder to charity.

Retirement Planning: Think about your future when working becomes optional. Whether you expect a typical full retirement or maybe a career change to something different, determining an appropriate balance between spending and saving for now and the future is important. There are many options available for saving for retirement, and we can help you understand which option is best for you. We have a great Retirement Planning Checklist for you to see if you are on track!

Cash Flow Planning: Review your annual spending and plan for next year. Understanding your cash flow needs is an important aspect of determining if you have enough assets to meet your goals. If you are retired, it is particularly important to maintain a tax-efficient, safe, and sustainable withdrawal strategy to cover your spending needs.  This is addressed in our Retirement Survival Guide and described in Planning for Retirement the R.I.T.E. Way®  (R.I.T.E. stands for “Retirement Income Taxed Efficiently” – see the image in the link from the guide). If you have not yet reached age 70 ½, it is prudent to ensure you are making tax-efficient withdrawal decisions. If you are over age 70 ½ make sure you are taking your required minimum distributions.  Otherwise, the penalties are significant if – up to 50%! This may also include reviewing strategies to maximize income from Social Security and Pensions.

Risk Management: It is always a good idea to periodically review all your insurance coverages. Recent catastrophic events like hurricanes serve as a powerful reminder to make sure your property and casualty insurance coverage is available when you need it. If you are in a Federal disaster area, there are additional steps to recover what you can and explore the tax treatment of casualty losses. Other areas of risk management that may need to be revisited include life, long-term care, and/or disability insurance.  There are both term and permanent options are available for life insurance and under certain situations, some policies may even help you save tax-deferred for retirement.

Education Funding: Funding education costs for children or grandchildren is important to many families. While the increase in college costs has slowed some lately, this is still a major expense for most families. It is important to know all the options available to save for education to determine the optimal strategy. Funding a 529 plan comes with tax benefits, so making contributions before the end of the year is key. With the added flexibility of funding k-12 years (set at a $10,000 limit), 529 accounts become even more advantageous. For those with kids in college, it is also important to understand the rules when it comes to taking 529 Plan withdrawals tax-free.  Don’t forget to submit your reimbursements prior to year-end. 

Elder Planning: There are many financial planning elements to consider as you age, and it is important to consider these things before it is too late. Consider planning for incapacity. There are many issues to consider when caring for your aging parents or other loved ones.  Having a plan in place for who will handle your financial affairs should you suffer cognitive decline is critical. Making sure your spouse and/or family understand your plans will help reduce family conflicts and have your wishes considered.

Business Planning: If you own a business, you should especially be paying close attention to your year-end.  Why?  Congress is constantly making tax law changes that impact many businesses and the tax they or their owners pay.  A new tax code section for businesses, 199A, gives business owners who are structured as an S Corp, Partnership, Single Member LLC, or Sole Proprietor the benefit of deducting an additional 20% for the net income of their taxes!  For many, this can be a huge saving.  The rules are very complicated and require that you plan at year-end to maximize your potential deduction.  The new tax law includes two new changes that limit the amount of interest you may be able to deduct and no longer allow net operating losses to be carried back to prior years. You can only carry them forward with a limit of what you can deduct in any year.  Also, if you are looking to start giving your employees more benefits and are considering setting up a qualified retirement plan, some options are required to be in place before the following calendar year depending on which plan is right for you. Whether it is a 401K, SEP IRA, Defined Benefit Plan, or Simple IRA plan, we can help you determine which plan is right for your business.

Conclusion: The decisions you make each year with your personal finances will have a lasting impact on your long-term financial plan. Do not leave tax benefits behind.  Do not miss out on savings today.  If you don’t have a financial plan, here is a short video that shares Avidian Wealth’s Financial Planning Process. We hope this letter has begun to generate some insight into areas of your personal finance that need attention. Please contact us when you are ready to talk through year-end planning.

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Disclaimer:

Financial Planning and Investment Advice offered through Avidian Wealth Solutions (Avidian), a registered investment advisor.  Avidian does not provide tax or legal advice and the information presented here is not specific to any individual’s personal circumstances. To the extent that this material concerns tax matters or legal issues, it is not intended or written to be used, and cannot be used, by a taxpayer for the purpose of avoiding penalties that may be imposed by law. Each taxpayer should seek independent advice from a tax professional based on his or her individual circumstances. These materials are provided for general information and educational purposes based upon publicly available information from sources believed to be reliable—we cannot assure the accuracy or completeness of these materials. The information in these materials may change at any time and without notice. Use only at your own peril.

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