Last Minute Tax Planning Tips for 2022
It’s that time of year again! As we close out 2022, be sure to consider any final opportunities to help reduce your 2022 income tax liability. While every situation is different (consult with your CPA), we have included a few tax planning tips for 2022 below.
ITEMIZED VS. STANDARD DEDUCTIONS
Beginning in 2018, the federal standard deduction for each filing status was nearly doubled. Additionally, the state and local income tax deduction allowed for itemized deduction purposes was limited to a maximum of $10,000. With these changes, many taxpayers no longer receive a benefit from itemizing deductions on their income tax returns. However, there are ways to maximize your itemized deductions to benefit from them exceeding your standard deduction. A few options include, but are not limited to:
Maximize Charitable Contributions Prior to Year-End
Up to 60% of your adjusted gross income (AGI) can be deducted for cash contributions made to qualified charities in 2022. Donor-Advised Funds (DAF) also qualify. Opening a DAF gives you the ability to donate now (and take an immediate deduction), but decide how the donation should be used later. While the donation itself is irrevocable, it can grow tax-free in the fund while you determine its best use.
Donating appreciated assets:
If you donate an asset you have held longer than one year (stock, for example) to a qualified public charity, you may be able to deduct the fair market value of the asset and avoid paying capital gains tax on a sale. It is important to note that appreciated asset donations are subject to a 30% AGI limitation. This is different than the 60% AGI limitation for cash contributions.
BUNCH ELIGIBLE ITEMIZED DEDUCTIONS INTO ONE YEAR
It can be beneficial to bunch any eligible itemized deductions. For example, making two or more years’ worth of charitable contributions in one year. Doing so may allow you to itemize deductions in one year, versus splitting them over multiple years, and taking the standard deduction each year. This works quite well for charitable contributions and medical expenses, in combination with other itemized deductions (i.e., mortgage interest and state and local taxes).
LOWER YOUR TAXABLE INCOME
Contribute to Tax-Advantaged Accounts
Consider maximizing your contributions to your 401(k), 403(b), health savings account (HSA), or 529 plan (for potential state-tax savings) up to allowable limits. Doing so could potentially lower your taxable income for 2022, while increasing the assets you have available for future retirement, medical, and education expenses.
Qualified Charitable Distributions (QCDs)
If you are age 70 ½ or older and have an IRA, you may want to consider making tax-free direct transfers (up to $100,000) from your IRA to eligible charities. A QCD could potentially reduce the amount of current or future Required Minimum Distributions (RMDs). Additionally, a QCD does not increase your AGI, thus will not adversely affect your itemized deductions, Medicare premiums, or taxable Social Security benefits.
Our tax planning tips for 2022 may not apply specifically to your individual tax situation. However, if you are in the position to utilize any of these options before year-end, they could be advantageous. Please reach out to our Tax & Financial Planning team with any questions! We wish you a happy holiday season and a wonderful new year!
Author: Angela Pound, CPA | Tax Manager
Written: December 21, 2022