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Year End Tax Planning Tips

December 05, 2022

Needless to say, 2022 has been an eventful year for most of us.

After coming off a solid year of portfolio gains, 2022 started off with a bang, in the literal sense, with Russia invading Ukraine, the Chinese shut down with a zero tolerance Covid policy, and the Fed taking an aggressive approach to raising interest rates throughout the year. Then, to top all of this, we had Hurricane Ian in southwest Florida, which resulted in extreme losses for those living near the Gulf, rivers, or the intercoastal waterway from storm surge.

So, as the old saying goes, “When life throws you lemons, make lemonade.“  We realize we have to make the best out of a bad situation. Here are few of our best year-end tax planning ideas that may help you to make some lemonade:

Tax Loss Harvesting
There were very few sectors of the equity and/or bond markets that were not down considerably in 2022. We could hold our portfolios and at some point in the future the unrealized losses on these holdings would potentially be offset by market growth. Or, per the IRS, one can recognized unrealized gains by selling positions today.  The realized loss can be utilized to offset future gains at any time (making the future gains affectively non-taxable). Each year you can use up to $3000 of these losses to offset ordinary income and you can carry forward losses until the death of the holder. 

Donor Advised Fund Contributions
Let us say you normally give to 10 charities each year in the amount of $1000 to each. You can transfer the next 10 years’ worth of gifts, or $100,000, to a donor advised fund (DAF) and deduct the full $100,000 as a charitable deduction in the year the gift is completed, subject to income limitations. Affectively, instead of reducing your taxable income by $10,000 in annual charitable contributions you would potentially reduce your taxable income by $100,000 from charitable contributions to a DAF for this tax year.  Then, for the next 10 years you would grant $1,000 to each charity each year from your DAF instead of making checks out to each charity.

This can also work well in conjunction with a charitable remainder unitrust, or CRUT for short. 

Charitable Gift Direct from IRAs
If you are 70 1/2 or older and have assets in IRAs, you can gift up to $100,000 per year, per spouse without paying income taxes on the money you have gifted directly from your IRA to a charity of your choice.  If you have RMDs (required minimum distributions) you may gift your RMD (up to 100,000 per year) to a charity and pay no income taxes on that distribution, while at the same time, satisfying your RMD for that tax year.

Converting a Traditional IRA to a Roth IRA
The environment we are in this year is a perfect environment to consider a conversion from your Traditional IRA to a Tax-free Roth IRA, especially if you have low taxable income in 2022 or have effectively reduced taxable income by using one of the techniques I had mentioned earlier. 

Disaster Zone Tax Relief and Casualty Losses
For those living in Southwest Florida, it has been declared a disaster zone.  If you suffered out-of-pocket expenses (flood insurance covers a maximum of $250,000) then you can take a casualty loss in 2022 or 2023 (your choice).  In past natural disasters, the IRS has given us some tax relief on retirement account withdrawals due to natural disasters. These may be significant tax planning opportunities for those individuals that suffered losses due to Hurricane Ian and had to take withdrawals from IRA accounts for home repairs. We will update you with any further tax relief as it is approved.   

Take Advantage of Short-term Interest Rates
Keep in mind, liquid money market funds as well as CDs are paying 3% to 4% today due to the Feds aggressive rate increases. The Feds increases have caused an inverted yield, which basically means that short-term interest rates are higher than long-term interest rates. Short-term T-bills, or short-term CDs from 3 months to 9 months may look attractive as holders of cash.

This is a brief snapshot of year-end planning you may wish to discuss with us.  We have extensive information on each of these scenarios and would welcome the opportunity to discuss with you in more detail…but remember to hurry, time is ticking!

Happy holidays to you & your family!