Key 2022 Tax Moves Before You Ring in the New Year

As we enter the final month of 2022, it’s important to review your tax situation and evaluate whether any actions should be taken by December 31. Below is a series of pertinent items that you will want to consider:

Review the capital gains and losses in your brokerage accounts:

• If your brokerage account reflects net capital gains in 2022, it offers an excellent opportunity to evaluate whether holdings with loss positions should be sold. This serves the dual purpose of protecting your capital gains from income taxation, thereby reducing your tax liability, as well as freeing up cash for use in a better investment opportunity. You can even re-purchase the same investment as long as at least 31 days have passed since the sale. (Repurchasing the same investment within a shorter time period can cause the loss on that investment to be disallowed.)
• Since 2022 has been a poor year for the market in general, your account may reflect a net capital loss for 2022. Deductions for such losses are limited to $3,000, with the rest carried forward to 2023. For example, if you have incurred a net capital loss of $25,000, only $3,000 is deductible in 2022, while the remaining $22,000 is carried forward to 2023. Accordingly, this may be an excellent opportunity to “harvest gains;” that is, if there are securities with unrealized capital gains that you feel have peaked, you may wish to sell them in 2022, the result being that the losses that you have already realized will cover your capital gains in whole or in part.

Consider making charitable contributions:

• There may be a tax benefit to making charitable contributions in 2022. If you currently itemize deductions rather than claim the standard deduction, charitable contributions will usually reduce your federal tax liability. Even if you expect to claim the standard deduction, your contributions may cause your itemized deductions to exceed the standard deduction so that a larger federal tax reduction will result. Also, depending on the tax laws in your state of residence, you may reduce your state tax liability as well.
• If you will be at least 70 ½ years old by the end of 2022, you can transfer up to $100,000 of your Individual Retirement Account (IRA) balance directly to charity. This is known as a “qualified charitable distribution;” you are not taxed on the distribution, nor do you deduct the contribution. Depending on your situation, this may reduce your tax liability. Additionally, if you are at least 72 years old and therefore required to receive annual distributions from your retirement accounts, the amount withdrawn from the IRA and directed to the charity will “count” towards your required distribution for 2022, thus reducing or eliminating the need to receive and pay tax on a separate distribution.

Consider making gifts to family members:

• In 2022, you can gift up to $16,000 per recipient without any effect on federal estate tax or gift tax. Spouses can do the same. In 2023, this amount increases to $17,000. So, a married couple could gift $66,000 to each of their children in a period of several weeks ($32,000 in December, followed by $34,000 in January), thereby reducing their respective estates and eventual estate tax. Note that gifts to grandchildren may be subject to additional “generation skipping” rules. State rules may differ as well. It’s also worth noting that most education and medical expenses paid directly to the school or medical facility are non-taxable gifts that do not count against the limitation noted above.
• Gifts beyond the parameters described above are accumulated against a “lifetime exclusion” that is currently $12,060,000 per person, but will increase to $12,920,000 in 2023. This unusually high increase of $860,000 per person ($1,720,000 per married couple) is a result of 2022’s high inflation rate. This presents an excellent opportunity for additional gifting by high net worth individuals who have already utilized the full, federal statutory exclusion. Furthermore, in 2026 the limits are scheduled to revert to approximately half of what they are now, so the opportunity, while excellent, is limited in duration and should be considered promptly. While this is an excellent opportunity, it is important to note that certain states, including New York and Connecticut, have significantly lower lifetime estate tax exclusions. Please be sure to consult with your tax professional before proceeding.

Have you received your 2022 Required Minimum Distribution (RMD)?

• If you attained age 72 in 2022, you must begin withdrawing funds from your retirement accounts in accordance with statutory life expectancy tables. You may defer your initial distribution to April 1, 2023, if you wish, but that will necessitate two RMDs in 2023, which could increase your marginal tax rate. Also, in New York, up to $20,000 of your RMD is excluded from taxation, so it might be better to receive at least $20,000 of your first RMD in 2022, rather than defer it to 2023, and sacrifice the 2022 exclusion. If you attained age 72 in an earlier year, you must receive your full RMD by December 31, 2022.
• If you have inherited an IRA, you likely have to receive RMDs regardless of your age. Rules for RMDs from inherited IRAs are currently in flux. Anchin will keep you apprised of the latest law changes.

Consider funding a Section 529 Plan:

• With higher education tuition costs always on the rise, Section 529 plans remain an excellent vehicle to provide for these costs. The initial contribution may reduce your taxes (New York State, for example, permits a married couple to deduct up to $10,000 of contributions), and the funds grow tax-free, to be used for qualified tuition costs when the time comes.

Have you made your 2023 elections to Flexible Spending Accounts and the like?

• If you are an employee of a firm that offers certain annual pre-tax employee benefits, now is the time to decide on how much to contribute for 2023. Such plans include:
  • Medical Flexible Spending Accounts – these accounts enable you to pay up to $3,050 of qualified medical expenses on a pre-tax basis in 2023.
  • Dependent Care Flexible Spending Accounts – these accounts enable you to pay up to $5,000 of dependent care expenses on a pre-tax basis in 2023.
  • Mass Transit and Parking accounts (commonly known as “transit checks”) – these accounts enable you to pay up to $300 per month of transit benefits, and another $300 per month of parking costs, on a pre-tax basis in 2023.
  • As an alternative to a Medical Flexible Spending account, if you are covered by a high-deductible health plan, you can contribute to a Health Savings Account on a pre-tax basis. The annual limits in 2023 are $3,850 for single coverage and $7,750 for family coverage.

Pass-Through Entity Tax (PTET) Elections:

• If you own a partnership or Subchapter S Corporation, you may be familiar with the tax advantages of PTET elections offered by New York and various other states. In some cases, such as New York State, the deadline for making such elections for 2022 has already passed. However, New York City recently enacted PTET legislation that parallels New York State, providing an additional tax-saving opportunity to partnerships and S-corporations operating in New York City. Since the legislation is new, elections for 2022 can be made as late as March 15, 2023. But, since an election and related tax payment by December 31, 2022 could result in a more immediate 2022 tax savings, it makes sense to evaluate this option now.

Tax planning is a complex process. There may be other considerations not listed above. Please contact your Anchin Relationship Partner to review your own situation. You are also invited to register for our complimentary webinar, “Tax Planning in Changing Times”, which will take place on Tuesday, December 13th from noon to 1:30 PM ET.