2022 Year-End Tax Strategies

Phil Roemaat is an advanced planning attorney at Northwestern Mutual. 

With the end of 2022 rapidly approaching, it’s important to close out your finances for the year on a positive note. In part, that means ensuring you’ve taken advantage of opportunities to minimize your taxes for both 2022 and the years ahead. While we don’t have a crystal ball, and upcoming midterm elections could determine the fate of proposed tax legislation, the good news is that the current tax planning environment is relatively stable. This means you should be able to take some actions now with confidence.

4 Year-End Tax Planning Strategies

As you think about year-end financial housekeeping, these four tried-and-true year-end tax strategies should be top of mind for high-income and high-net-worth taxpayers:

Strategy 1: Timing income and deductions properly

Generally, people seek to maximize deductions and minimize income each year to help defer taxes. The benefits of tax deferral tend to be positive when tax rates stay the same or are going down. However, this strategy can be reversed when you expect to be in a higher income tax bracket in the future.

Here are two income and deduction timing tactics to consider for 2022:

Tax-loss harvesting — You might be able to offset taxable income by harvesting capital losses. For most of 2022, the equities market has been down, and that means if you own stocks, you likely have capital losses in your portfolio. Consider working with your financial advisor to realize capital losses that will help offset current or future capital gains and even ordinary income.

Capital gain harvesting — Depending on your other income streams, capital gain harvesting could also be an option for you. If you are married filing jointly and your overall 2022 taxable income is below $83,350, or if you are single and your income is below $41,675, you can pay a 0 percent tax rate on capital gain income. This can be a useful strategy if you are a pass-through business owner with an expected net operating loss from your business this year, but you expect the business to return to profitability in future years.

Strategy 2: Charitable Giving

While some expanded charitable giving tax deduction techniques that were a part of pandemic-related legislation have now expired, there are still ample charitable giving planning opportunities with tax benefits to take advantage of this year-end.

Here are three tried-and-true charitable giving tactics you can leverage in 2022:

Qualified charitable distributions — If you are an IRA owner who is at least 70½, a qualified charitable distribution, or QCD, can allow you to send distributions directly from your IRA to a qualified charity without impacting your adjusted gross income (AGI). Better yet, QCDs of up to $100,000 count toward your required minimum distribution (RMD). This is a tax-efficient way to make a charitable contribution, especially if you are taking the standard deduction.

Bunching charitable deductions — When filing your taxes, you have the option of taking the standard deduction or itemizing, whichever is more favorable to you each year. Because the Tax Cuts and Jobs Act (TCJA) nearly doubled the standard deduction when it passed in 2018 and limited the state and local tax itemized deduction, most Americans, including many high-income and high-net-worth taxpayers, now take the standard deduction. This allows you to pool or “bunch” multiple years of charitable deductions together in one tax year so you can exceed the standard deduction in that year. Then, in off-years when you are not donating, you can use the standard deduction instead, allowing you to maximize your deductions over many years. It’s worth noting that this strategy works well when paired with the use of donor-advised funds.

Donate appreciated publicly traded securities — Donating appreciated stocks or other publicly traded securities in-kind serves two important purposes. First, it gives you a tax deduction equivalent to the fair market value, assuming the assets go to a public charity and do not exceed 30 percent of your AGI (or 20 percent of AGI if giving to a private foundation). Second, you’ll pay no tax on your gains.

Strategy 3: Retirement Planning 

If you are preparing for or are in retirement, you should consider these three tax-efficient planning options in 2022:

Maximize retirement contributions — If you have not maximized your retirement contributions for 2022, consider bumping up your contribution amounts. For 401(k)s and 403(b)s, you can contribute $20,500 plus a $6,500 catch-up contribution if you are over age 50. For SIMPLE IRAs, you can contribute $14,000 plus a $3,000 catch-up contribution if you are over age 50. For 401(k)s, 403(b)s and SIMPLE IRAs, your contributions must be made before Dec. 31, 2022.

Traditional and Roth IRAs have a contribution maximum of $6,000 plus a $1,000 catch-up contribution if you are over age 50. However, you have until April 18, 2023, to make this contribution.

If you or your spouse actively participates in a qualified plan through an employer, there are AGI phaseouts that may limit your ability to contribute. Before filing your tax return, check with your tax or financial advisor as to whether you are eligible and how much you may contribute. 

RMDs — If you haven’t already, make sure to take your RMD(s) from your IRA(s) or qualified plan(s) before Dec. 31, 2022. Failing to do so can result in a 50 percent excise tax based on the amount you should have taken. If you turned 72 in 2022, you can delay your first RMD until April 1, 2023, but you’ll have to take two RMDs in 2023.

Roth conversions — Down markets create an opportunity, as with tax-loss harvesting, to convert a traditional IRA to a Roth IRA. Roth conversions trigger current ordinary income tax, but future qualified distributions are generally tax- and penalty-free to you and to your heirs. Additionally, Roth IRAs do not have RMDs, which makes them attractive if you don’t need future income or are looking to minimize taxable income in retirement.

Lastly, if you believe your income is going to be higher during retirement, converting to a Roth IRA this year can help manage your overall tax burden. However, Roth conversions cannot be undone, so you need to be fully committed to paying any taxes associated with the conversion this season.

Strategy 4: Gift and Estate Planning

This year brought a new opportunity for many estate planners: low valuations and rising interest rates. Low valuations allow you to transfer more assets (for example, more shares of stock in a family business) to the next generation. As for rising rates, if your planning includes loaning funds to your children or your grantor trusts, higher interest rates can erode the effectiveness of these techniques, but it makes charitable remainder trust planning more attractive.

Here are five estate planning ideas to consider before year-end:

Annual gift tax exclusion — The federal gift tax exclusion is $16,000 per donor, per donee (person receiving the gift from you) for 2022. The gift can include a check, a transfer of securities or a transfer of life insurance. Additionally, annual exclusion gifts do not count toward your lifetime estate and gift tax exemption, so it is effectively a use-it-or-lose-it option. Married couples can gift a total of $32,000 to each child, grandchild or anyone else via the annual exclusion.

Education planning — College savings 529 accounts offer gift, estate and income tax benefits. The growth on a 529 account is income tax-deferred, and funds used for “qualified higher education expenses” are income tax- and penalty-free. Depending on where you live, your state may tax deductions or credits for 529 contributions, so be sure to check with your tax professional.

Over time the definition of a qualified higher education expense has expanded to include more than just college tuition, room and board, and supplies. The definition now includes up to $10,000 for elementary or secondary schools each year, expenses for apprenticeship programs and up to $10,000 in student loan payments over the course of the account holders’ lifetime. Lastly, 529 accounts can be rolled over into a 529 ABLE account.  

If you are a parent and grandparent, a planning tactic you should consider is the use of the “super-annual exclusion gift” whereby you can elect to treat the gift as if it is spread over the next five years of annual exclusion gifts at one time. This allows you to make a gift of $80,000 ($160,000 if you are married) into a 529 account.

Lifetime gifts — The gift, estate and generation-skipping transfer tax exemption is $12.06 million for 2022. In 2018, the TCJA doubled this amount from $5 million to $10 million (indexed for inflation). This higher exemption amount is set to sunset at the end of 2025, and in 2026, the exemptions are expected to revert to the prior $5 million limit indexed for inflation.

The IRS has provided guidance under the “anti-clawback” regulations for taxpayers to take advantage of the current rules. For example, if you gave away $12.06 million in 2022 and died in 2026, when the estate tax exemption is expected to be $6.5 million, $5.56 million would not be included in your estate. This equates to a tax savings of more than $2.2 million using the current 40 percent gift and estate tax rate.

If you are married, one strategy is using one spouse’s $12.06 million before the law changes (to lock in the current exemption amount) and saving the other spouse’s exemption for a future year. This can help minimize taxes while keeping enough money in the estate for your lifetime.

If you are concerned about a future estate tax liability when the sunset occurs, you should talk with your financial advisor and/or estate planning attorney to implement strategies today that will help minimize your estate tax at death.

Consider moving life insurance to an ILIT — With the gift and estate tax reversion in 2026, you might consider moving your existing policies into an irrevocable life insurance trust (ILIT) in 2022. When a life insurance policy is gifted to an ILIT, there is a three-year lookback rule in which the death benefit is brought back into your gross estate. If you survive three years and a day, it is then outside the estate. If you make the gift now in 2022, the three-year clock will end in 2025 while estate tax exemptions remain doubled.

Charitable remainder trusts — While not a new planning technique, charitable remainder trusts (CRTs) came back into vogue recently, thanks to the rising interest rate environment. A CRT provides for distributions to a beneficiary during the trust term with the remainder payable to charity. The trust term can be for several years or based on the life of an individual. A CRT allows you to make a gift to charity while preserving an income stream personally or for any other non-charitable beneficiary. Additionally, when appreciated assets are transferred to the trust, the CRT can sell the appreciated asset without paying tax on the gains. Lastly, you can receive an immediate charitable income tax deduction. A CRT works well in a high interest rate environment (compared to a lower interest rate one) because it creates a larger upfront charitable tax deduction.

2 Changes to Watch for as Year-End Approaches

Any election year brings a bit more uncertainty in the tax planning environment. Here are two tax items that you should watch out for as year-end approaches:

1. SECURE Act 2.0

There are a few bills in Congress focused on helping Americans save more for retirement that could be included in a year-end omnibus package. In general, from a tax-planning perspective you’ll want to keep an eye on changes to the RMD age, increased catch-up contribution limits and expanded Roth options.

2. Build Back Better 2.0

Depending on the outcome of the midterms, it is possible for concepts originally incorporated in the proposed Build Back Better legislation to come back to life. Generally, that would require Democrats to increase their control in the Senate and maintain a majority in the House. If this were to happen, previously proposed changes may be reconsidered. Some to keep an eye on include higher income tax brackets for high-income earners, state and local tax cap changes, elimination of the backdoor Roth IRA and changes to grantor trusts. Should there be a blue wave this November, you should revisit your year-end planning strategies.

Your Financial Advisor Can Help You Maximize Tax Savings

Year-end is a great time to consider how you can reduce your tax bill and revisit your overall circumstances compared to your current financial plan and objectives. Effective planning takes time and requires paying attention to the details. Connect with your financial advisor today to get a jump-start on your 2022 year-end planning to help maximize your tax savings.

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This article is not intended as legal or tax advice. Northwestern Mutual and its financial representatives do not give legal or tax advice. Taxpayers should seek advice regarding their particular circumstances from an independent legal, accounting or tax adviser.