My lovely wife, Susan, recently informed me, “the Christmas tree is going up before we leave for Thanksgiving”.
While I like to experience holidays one at a time, apparently my wife likes to experience them all at once. As I considered the strange interplay in my home between pumpkins, pilgrims, turkey, pine trees, and Christmas lights, I was reminded that another year-end is fast approaching.
Here are nine impactful planning ideas to consider as we close another calendar year.
1. Maximize Your Retirement
The IRS recently released their Contribution and Benefit Limits for 2023. As you can imagine, there are some impressive inflation adjustments.
401(k) participants will be getting a bump in how much they can contribute by $2,000 to $22,500. Catch-up contributions for those age 50 or older will allow a combined $30,000 of contributions!
Contribution limits to Traditional and Roth IRAs are increasing by $500 to $6,500.
Don’t forget to max-out your 401(k) contribution for this year. If you are 50 years or older (or will turn 50 years old anytime during 2022), you are eligible for the catch-up contribution Make sure you have contributed both the $20,500 deferral and the $6,500 catch-up maximum by December 31st. Then, in January, you can elect to defer the new higher amount in 2023.
You can download this chart for future reference here.
2. Maximize Your Health Savings Account (HSA)
HSAs can be a powerful savings tool for high income families. In fact, they are the only investment vehicle that delivers triple-tax benefits: contributions are tax-deductible, earnings grow tax-deferred, and withdrawals are tax-free when used for qualified medical expenses.
You can read more about how high-net-worth families use HSAs here.
If you are covered under a high-deductible-health-plan you have the option to make a tax-deductible contribution to your HSA.
For 2022, a high-deductible-health-plan is defined as one which requires minimum annual out-of-pocket deductibles of $1,400 for an individual and $2,800 for families. Yearly out-of-pocket expenses (including deductibles, copayments, and coinsurance) cannot be more than $7,050 for an individual or $14,100 for a family. You also must not be enrolled in Medicare, covered by another health plan that is not a high-deductible-plan, or claimed as a dependent on someone else’s tax return.
You have until April 15th to maximize contributions and have them count for 2022.
3. Maximize Your Charitable Contributions
In 2022, the Standard Deduction is $12,950 for single filers or $25,900 for married filing jointly. It is estimated that more than 85% of taxpayers claim the standard deduction on their tax return.
However, high earners often itemize deductions when the total of mortgage interest, state and local taxes (SALT), and charitable contributions exceed the standard deduction. To take full advantage of charitable deductions (other than the obvious altruistic benefits), you really must itemize.
If you’ve had an uncharacteristically high income this year, you can use “charitable bunching” by making a larger than usual tax-deductible contribution to a Donor Advised Fund (DAF). Bunching allows you to advance your next few years of charitable gifts into the current tax year. The aim is for this deduction to exceed the standard deduction so you can take a large tax deduction today. In future years, you then direct your DAF to make gifts to charities on your behalf with the timing and dollar amount of your choosing.
You can read more about DAFs and making the most of your charitable contributions here.
Cash is not always the most efficient asset to give to charity. Consider donating highly appreciated securities to a Donor Advised Fund to maximize your charitable contribution and minimize taxes.
4. Required Minimum Distributions and IRA Contributions
The SECURE ACT, which was signed into law in 2019, provides two enhancements for retirees and pre-retirees.
- Required Minimum Distributions (RMDs) from IRAs/401(k)s were pushed back to age 72. This allows an extra 1 ½ years of additional compound growth and tax deferral.
- Contributions to Traditional IRAs can be made at any age. Under the old rules, contributions were disallowed after reaching 70 ½. If you have earned income and a desire to pad your Traditional IRA, there’s still time to make a contribution prior to April 15th.
If you turned 72 years old in 2022, you have until April 1st of 2023 to take your first RMD. However, that means you’ll take two RMDs in the same the calendar year. Subsequent RMDs must be taken by December 31st annually thereafter.
5. Gifting to Loved Ones
The estate tax exemption is $12,060,00 per person in 2022 and will rise to rise to $12,920,000 2023.
If the value of your estate is more than $12,000,000 (individual) or $24,000,000 (couple) it may be a good time to sit down with your estate attorney to determine if large gifts to children and/or charities make sense for your situation.
Estate tax exemption limits are always in the crosshairs of politicians. Even in the absence of new legislation, the increased exemption amounts are scheduled to be reduced in January of 2026.
Remember, too, that anyone can give up to $16,000 of tax-free gifts per person each year. (This limit gets a boost in 2023 to $17,000.) Annual gifts do not rollover, so make your gifts before year-end.
Since the annual gifting limit is $16,000 per person in 2022, a husband and wife with two married children and four grandchildren could gift a total of $256,000 in 2022. (That’s $16,000 to each of the 8 family members, from both husband and wife, or $32,000 x 8!)
6. Make a Qualified Charitable Distribution (QCD)
One of the most exciting aspects of the Pension Protection Act of 2006 was the Qualified Charitable Distribution, or QCD. A QCD allows you to make a charitable donation directly out of an IRA account up to a maximum of $100,000 per person/per year. The amount donated directly offsets the Required Minimum Distribution.
High-net-worth individuals in the RMD stage are typically receiving more in required distributions than they want or need. By donating to your favorite charity directly from an Individual Retirement Account, your required distribution and taxes are reduced under the QCD method. This is especially important for those unable to itemize their deductions, as now their charitable donations can be taken in full. If you are currently taking RMDs and making charitable donations, QCD’s can be a fantastic strategy.
Review your ongoing and upcoming charitable gifts and consider a donation straight from your RMD.
7. Tax Loss Harvesting
It’s normal for markets to go down from time to time, and now is one of those times. There is a silver lining, though.
Tax-loss harvesting is the process of selling an investment that has dropped in value below an investor’s cost basis to lock in a paper loss. The investor then reinvests the sale proceeds into a different security that still meets their overall investment risk profile and asset allocation strategy. The recognized loss can then be used to offset taxable gains in other parts of the portfolio, or it can be carried over to offset capital gains in future years.
For our clients, we’ve been actively harvesting losses all year. In fact, it’s such a core part of our value proposition that we wrote a quick explainer on it: When Life Hands You Lemons – The Power of Tax Loss Harvesting.
Don’t be surprised if you receive a negative 1099 tax document next March - it’s just us squeezing some lemons.
2022 may be a great time to divest from concentrated stock positions that have historically carried large, embedded gains. You can reinvest into a diversified portfolio and use capital losses to offset some or all of the gains.
8. Roth Conversion
If you are experiencing a low-income year, consider converting all or a portion of a Traditional IRA to a Roth IRA. Doing so means you’ll recognize income today on the amount converted, but withdrawals in the future will be tax-free.
The first $10,275 of ordinary income for single filers and $20,550 (for married filers) carries a 10% federal tax rate. The rate is only 12% up to $41,775 and $83,550 respectively. You may consider converting up to the max of the first two brackets if your expected income in the future (earned income, Required Minimum Distributions, Pension, etc.) will be higher.
If you’re carrying an ordinary loss on your tax return, you could convert Traditional IRAs to Roth essentially tax-free as you eat into the loss.
It’s worth a discussion with your CPA and financial advisor.
Converting from Traditional to Roth is not an all or nothing proposition. You can make partial conversions and spread them out over several years.
9. Update Your Beneficiary Designations
The end of the year is a great time to make sure your beneficiaries are current. Log into your 401(k) plan, speak with your HR administrator, pull up your IRAs and life insurance policies, and request a review of your beneficiary designations to verify that they match your current wishes.
Life transitions, such as divorce or the death of a spouse, are incredibly difficult. It’s understandable that during these challenging times, beneficiary designations are sometimes overlooked and left unchanged. This is your reminder to review them.
Whatever you have listed on a beneficiary form usually overrides what is written in your will or trust. A beneficiary form provides its own direction for the asset it covers, so make sure it accurately reflects your wishes.
Now is an ideal time to review these nine year-end planning tips, as even one of them can make a positive difference in your plan.
Please reach out to us to talk through any of these planning opportunities in more detail.
If your home is anything like mine, I’m wishing you a wonderful HallowThanksGivMas!