Tax planning is an integral component of a comprehensive and effective financial plan. Tax planning should be a coordinated effort between all professional advisors: tax professionals, wealth managers, and estate and trust consultants.
As we enter the fourth quarter of 2022, taxpayers and their advisors need to be proactively coordinating tax strategies with ample time to execute prior to December 31, 2022. Here are some tax savings and financial planning strategies to discuss with LTax or your tax advisor.
Tax-Loss Harvesting — Recognizing Capital Losses to Offset Capital Gains Recognized During 2022
Given the extreme volatility in the stock and bond markets during 2022, this may be an excellent time to recognize capital losses in the context of tax mitigation and portfolio rebalancing:
- Review net short-term capital gains and short-term capital losses.
- Review net long-term gains and long-term capital losses.
- Deduct up to $3,000 of excess losses against ordinary income per year.
- Carry over any remaining losses to future years.
Roth IRA Conversion
If the above-referenced tax-loss harvesting strategy is effectively executed, 2022 may be a year with very low capital gain exposure and a lower overall tax liability for many taxpayers. This condition may provide an opportunity for taxpayers to convert all or a portion of their traditional retirement accounts to Roth IRAs.
The primary benefit of converting an eligible retirement account to a Roth IRA is tax-free distributions for you and your heirs, and the elimination of required minimum distributions (RMDs) during your lifetime.
Qualified Charitable Contributions
A qualified charitable distribution allows individuals who are at least 70.5 years old to donate up to $100,000 to one or more charities directly from a taxable IRA. This will count toward satisfying their RMD.
Additionally, due to 2022 tax code changes limiting deduction amounts for cash contributions based on adjusted gross income limits, this option may offer an opportunity for higher tax savings.
The 2022 tax year is the final chance for businesses to take advantage of the 100% bonus depreciation under the Tax Cuts and Jobs Act of 2017 (TCJA). Bonus depreciation is a tax-savings strategy that allows taxpayers to deduct 100% of the cost of an asset in the first year it is placed in service. Bonus depreciation decreases to 80% on January 1, 2023.
Pass-through Entity Tax Election
The pass-through entity tax allows partnerships and S corporations to elect to be taxed at the entity level for state income tax purposes. This strategy acts as a workaround of the $10,000 cap on state and local taxes (SALT) itemized deduction. If the entity makes the election, the partner or shareholder will be able to reduce federal income tax by the state taxes paid at the entity level without being limited to $10,000 of SALT deductions. The partner or shareholder will also receive a credit on their state tax return. This credit is either refundable or nonrefundable and carried forward, depending on the state.
Estate and Gift Taxes
The current estate tax exclusion is $12,060,000 for an individual and $24,120,000 for married U.S. residents. These exclusion amounts are approximately double the previous inflation-adjusted amounts of $5,490,000 and $10,980,000 prior to the TCJA.
These exemption amounts are scheduled to end on December 31, 2025. It is expected the amounts will revert to prior exemption amounts adjusted for inflation — approximately $6,200,000 for individuals and $12,400,000 for married U.S. citizens.
Individuals and families with sizable taxable estates should consult with their tax advisors and estate and trust consultants to develop a comprehensive estate tax mitigation strategy. This strategy may include the below irrevocable trusts or entities.
Spousal lifetime access trust
Intentionally defective grantor trust
Grantor retained annuity trust
Charitable lead trust
Charitable remainder trust
Family limited partnership
Limited liability company
Inflation Reduction Act (2022) — Clean Energy Incentives
Two tax credits are available to homeowners who invest in home-efficiency upgrades:
Nonbusiness energy property credit — 30% tax credit with an annual cap:
Exterior doors and windows
Biomass stoves and boilers
Residential clean energy credit — 30% tax credit with an annual cap:
Other equipment, such as wind, geothermal, and biomass fuel systems, that harnesses renewable energy
Please note that each of these items has an annual cap for tax credits.
This is the time to be proactively coordinating tax strategies to execute prior to year-end. Please contact LTax with any questions.