As December rolls around, many people shift focus away from their day to day lives and turn their attention towards the holidays. It is the season of giving, spending time with loved ones as well as a time to reflect on the past year. It provides a great opportunity to take “stock” in your accomplishments and to build out goals for the year to come. As we all know, when the calendar turns, it is also time to unfortunately begin the journey of tax preparations. On that note, there are a few things you can do now to help soften the blow of April 15th.
Charitable Giving:
One of the best ways to minimize your personal tax liability is to give to charity, if you itemize your deductions. There are several benefits of doing this. If you have a highly appreciated asset that you’ve held for more than one year, you can deduct the fair market value of the donation and avoid income tax on your appreciation.
You can also explore setting up a donor advised fund with a fund sponsor. What this allows you to do is make contributions to the fund this year (and claim the deductions), while waiting until 2023 to select where and when you want the money to be distributed. This is especially helpful for people that want the deduction for this tax year but haven’t decided exactly which charity they want to donate to. This type of fund is often funded with assets from a high-income event, such as selling a business or real estate, receiving an inheritance, or donating securities with high market appreciation.
Taxpayers who are over the age of 70 ½ can also make direct contributions from your IRAs to a charity of your choice. You can distribute up to $100,000 per year and that amount will come off your gross income. For taxpayers over the age of 72, these contributions will also count towards your RMD.
Harvesting Capital Losses:
With disappointing market performance in 2022 (the NASDAQ composite currently sits at -27.63% YTD return at the time of writing) now may be an opportune time to sell off losses you may be holding in your portfolios. If your realized capital losses exceed your realized capital gains, you are entitled to deduct up to $3,000 a year from your ordinary income. Any losses on top of that may be carried forward indefinitely. Keep in mind the “wash sale rule” where you have to wait 30 days after the sale of a stock to purchase it back to gain the benefit. This also includes purchasing any stock that may be considered a “substantially equivalent stock or security” within that 30-day window.
As an aside, you may also donate the proceeds of the sale directly to a charity. This will allow you to not only realize the capital losses but will count towards your charitable contribution deduction.
Convert your Traditional IRA to a Roth IRA
A common strategy to reduce taxable income is to contribute to a traditional IRA. Contributions are deductible until April 15th for the prior tax year, subject to limitations, and your money grows tax deferred; however, future distributions are taxed as income. On the other hand, a contribution to a Roth IRA is not deductible in the year made; however, the dollars grow tax-free, and you do not pay taxes or penalties on distributions. Which type of IRA makes the most sense to you depends upon several factors, including whether you think your tax rate will be higher or lower in the future. If you expect it to be higher, you may benefit from contributing to a Roth IRA, paying taxes now and enjoy tax free distributions in the future.
Roth IRAs can be funded either directly or by converting a traditional IRA. To contribute directly to a Roth IRA in 2022 you must be either a single filer with income less than $144,000 or married filing jointly with income less than $214,000. For those that do not qualify due to income, there is a workaround that is commonly referred to as a “back door Roth conversion”. This process is where you either have an existing traditional IRA or open a non-deductible IRA and then convert the funds to a Roth IRA. You pay tax on the money converted, if you previously received a deduction; however, because there are no income limits on who can make non-deductible contributions, you can convert even if you are otherwise ineligible. These conversions are particularly useful if you are in a lower tax bracket now but expect to be in a higher tax bracket in the future.
As the calendar year continues to wind down, it’s important to celebrate the past while keeping an eye towards the future. These useful tips can help you navigate your future tax burden as you continue to build your wealth while having the opportunity to maintain control over how much you keep. As always, please consult your tax professional to see how this will affect your personal situation. If you have any questions, I encourage you to reach out to your director here at Greystone Financial Group. Happy Holidays!
Eric Moss
Director
Disclosures:
This is provided for informational purposes only and should not be interpreted in any way as investment, tax, accounting, legal or regulatory advice. An investor must take into consideration his/her individual circumstances.
There is no guarantee investment strategies will be successful. Investing involves risks including possible loss of principal. There is always the risk that an investor may lose money. A long-term investment approach cannot guarantee a profit. All expressions of opinion are subject to change. This article is distributed for educational purposes, and it is not to be construed as an offer, solicitation, recommendation, or endorsement of any particular security, products, or services. Investors should talk to their wealth advisor prior to making any investment decision.
