Breaking the Code: Year-End Planning
By: Meera Bhanushali & Justin Lin
The end of the year is fast approaching! It's time to revisit tax planning strategies, review scenarios, and consider implementation prior to year-end. We have highlighted a few options in order to start the conversation.
Charitable Giving
If charitably inclined, there are a few considerations when structuring your contributions for 2022. Cash contributions made to qualified organizations are limited to 60% of a taxpayer's adjusted gross income (AGI). With static standard deduction rates for 2022, we still recommend considering bundling charitable contributions. This could be done by timing contributions (i.e. pulling forward 2023 donations to December or delaying usual 2022 donations to January) or contributing to a Donor Advised Fund (DAF).
DAFs allow individuals to fund accounts and receive a tax deduction today and distribute both the original funds and earnings to charities over time. Taxpayers can also donate appreciated stock to a DAF or directly to charities. This allows individuals to take advantage of both a charitable deduction and avoid realizing capital gains on the appreciated stock. Non-cash charitable contributions greater than $5,000 other than stock require an appraisal of items donated. One note that is consistent with previous years: all donations must be made by December 31, 2022 in order to be eligible for taxpayers’ 2022 tax returns.
Annual Gifting
For personal gifting, taxpayers may give up to $16,000 each (increased $1,000 from 2021) to as many individuals as they would like with no tax implications or any reduction of the lifetime gift and estate tax exemption. For gift tax purposes, the date of the completed gift is the date the check is cashed / funds are transferred - the check must be cashed on or before 12/31 to count for this tax year. This exclusion will increase to $17,000 in 2023.
Retirement Plans Actions
Consider making the maximum contributions to retirement accounts - 401(k)s have a contribution deadline of 12/31, while traditional IRAs, Roth IRAs, SEPs and Simple IRAs have an extended deadline of 4/15. If you are 50 or older, you may make a catch-up contribution as well.
Individuals may want to consult with financial advisors and consider converting pre-tax traditional retirement accounts to post-tax Roth accounts prior to year-end. This scenario may be attractive if 2022 income is expected at lower tax rates than typical years. The benefit, though it will result in higher income taxes for 2022, is that the post-tax assets will accumulate in the Roth and allow tax-free distributions in the future.
Flexible Savings Account (FSA) and Health Savings Accounts (HSAs)
FSAs and HSAs are pre-tax accounts that can be used to cover out-of-pocket healthcare expenses. FSA funds are required to be used by 12/31 (“use it or lose it”). HSAs allow individuals to contribute $3,650 a year and families to contribute double that amount, plus an additional $1,000 for those over 55. The contribution deadline for HSAs for 2022 deductions is 4/15.
We are also including some important tax numbers for 2023 below. Please don't hesitate to reach out with any questions on your specific tax situation.
To ensure compliance with the requirements imposed on us by IRS Circular 230, we inform you that any tax advice contained in this communication (including any attachments) is not intended to and cannot be used for the purpose of: (i) avoiding tax-related penalties under the Internal Revenue Code, or (ii) promoting, marketing or recommending to another party any tax-related matter(s) addressed herein.