With 2022 racing to a close, we are carefully reviewing each client’s situation to identify the most effective tax-saving strategies. Please consider our year-end planning suggestions below, as they are likely to be applicable to your tax situation.

Federal Updates

Capital Gain Harvesting or Loss Harvesting: Capital gains tax rates are currently expected to remain unchanged. With recent market conditions, it may be a good time to harvest losses. Total net capital losses (after offsetting all realized capital gains) are only allowed to offset other income such as interest and dividends up to a maximum of $3,000 in any given year. However, the excess is carried over indefinitely and can be used to offset future realized gains. Assuming you have excess realized losses this year, you may also consider realizing gains to offset current year losses. If you have investments you intend to write off, but the companies have not yet shuttered, we can advise regarding strategies implemented to accelerate losses.

Energy Credits: The Inflation Reduction Actincreased the federal solar tax credit to 30% and extended it through 2032. (It had previously been reduced to 26% starting January 1, 2022.) In addition, starting in 2023, the prior $500 lifetime credit for energy efficient home improvements has been increased to a $1,200 annual limit, subject to specific improvement limitations.

General Charitable Contributions: Donations made to charitable organizations are deductible if taxpayers itemize their deductions. Gifting a combination of cash and stock to public charities in 2022 grants you a deduction of up to 50% of your adjusted gross income. The 100% deduction is no longer available for tax year 2022. To donate a combination of stock and cash, you could gift appreciated stock up to 30% of your AGI to a public charity.

Charitable Contributions of Appreciated Assets: Rather than using cash to support your favorite charity, consider gifting highly appreciated assets held for over one year. This will yield a double tax benefit: you receive a charitable deduction for the fair market value of the donated assets and forgo paying capital gains taxes on the gains. Please note the deduction on donating appreciated assets is limited to 30% of your adjusted gross income. Any overage is rolled forward for five years until used.

State and Local Tax (SALT) Deductions Capped: Combined state income tax and property tax deduction is still limited to $10,000 for 2022.

Taxpayers who are partners or shareholders in a trade or business passthrough entity (S-corporation or partnership) may want to consider whether it is beneficial to elect into the new California passthrough entity tax. This allows a tax deduction to an entity’s shareholders or partners without limitation for Federal purposes, and a credit for California purposes. We encourage you to ask us about this potential deduction as the calculations are complex and, in some circumstances, may be limited. Please note that in order to elect into this provision for 2022, California requires that a specific payment must have been made by June 15th, 2022, by the passthrough entity. If the passthrough entity did not make this payment, it may not be possible to elect in for 2022, but election may be possible in future years.

IRA Funds: Reminder: Take your Required Minimum Distribution (RMD), if applicable. RMD relief due to COVID-19 is no longer applicable.

Recent market conditions have been tumultuous. Consider whether it might be beneficial to convert your traditional IRA or rollover your IRA to a Roth IRA. This might be beneficial if the assets in your traditional or rollover IRA are currently depressed, or you might be in a lower tax bracket due to market conditions this year. Converting your traditional or rollover IRA to a Roth IRA will result in recognizing income currently but does provide the future benefit of tax-free distributions with no required distributions and some ability to leave some of these assets to your family upon your passing.

Mortgage Interest Deduction: Taxpayers looking to purchase new homes may now deduct mortgage interest on loans up to $750,000 of the principal ($375,000 for married filing separate taxpayers). Interest on home equity indebtedness is no longer deductible. For loans written prior to 12/15/17, which are “grandfathered,” interest can be deducted up to $1M of the principal. Refinances after 12/15/17 are still eligible for “grandfathered” treatment if the original debt was secured before 12/15/17. Mortgage loans on rental properties are still fully deductible. Certain loans where proceeds were used for investing purposes may also be deductible as investment interest expense.

Qualified Small Business Stock (QSBS): Gains on sales of Qualified Small Business Stock held for more than five years may be eligible for a federal gain exclusion ranging from 50% to 100%, depending on your date of purchase. Taxpayers not yet meeting the 5-year holding requirement may be able to defer recognition of their capital gains by rolling over their proceeds into new QSBS investments.

20% Passthrough Deduction (Section 199A): Your self-employed or passthrough operating business income may be eligible for the deduction. We encourage you to ask us about this potential deduction as the calculations are complex and, in many circumstances, may be limited.

Stock Options: If you own options with fast-approaching expirations dates, or options with exercise prices well below today’s market value, it may be time to consider exercising. When to exercise options is a matter of personal preference contingent upon your own beliefs about the future potential of the stock. However, we must caution that there are major tax implications to consider when exercising. We strongly recommend seeking our advice before exercising options.

Bonus Depreciation: As a reminder, the Tax Cuts and Jobs Act (TCJA) allows full and immediate expensing of 100% of the cost of qualified property acquired and placed in service during the period between September 27, 2017 and January 1, 2023. Additionally, bonus depreciation is available for both new and used qualified property.

Gifting: Current legislation does not include any changes to the lifetime exemption (the maximum amount a person can give during their lifetime or at death without incurring federal gift or estate taxes). The amount of lifetime exemption for the 2022 tax year is $12.06 million and, without any tax law change this year, will continue to be adjusted for inflation each year. Under current tax law, the lifetime exemption is set to sunset at the end of 2025 and revert to $5 million per person in 2026. With the possibility of the lifetime exemption being reduced at some point, you may consider your own personal estate and gift planning. Please note that each taxpayer may still make annual exclusion gifts of up to $16,000 per recipient without affecting their lifetime exemption.

Under current market conditions, it is an ideal time to make gifts of assets while values are depressed or depreciated. Certain estate gifting strategies such as forming a grantor retained annuity trust (“GRAT”) may be useful. Using a GRAT strategy, appreciation passes to your beneficiaries without usage of your lifetime gifting exemption. Gifting strategies are complex, and we encourage you to contact us or your estate planning advisor to discuss the best options available to you.

Talk to Us

We are prepared to strategize. Let us help you reap any benefits still allowed by the latest tax reforms. We are happy to discuss any questions that you may have about minimizing your taxes and maximizing any benefits with actions you can take now, in 2022. Contact us today to learn more about tax planning options specifically tailored to your financial goals.