In any calendar year there are opportunities to capture “tax alpha,” value-add to your wealth in real terms, by making prudent decisions around the timing of your income, spending, capturing of investment gains and losses, planning charitable gifts, and transferring wealth from your taxable estate.
In 2022, inflation is up, and markets are down—which doesn’t feel nice at all. However, this calendar year is looking like a potential opportunity to help your wealth work harder for you and your future beneficiaries, on a net-of-tax basis.
Why is this?
- Higher inflation in 2022 affects the calculations by which the IRS adjusts various thresholds and limits, pushing them higher for 2023 than what was typical in past years. In 2023, the top marginal tax bracket will move up 7% to $693,750 (for married individuals filing jointly and surviving spouses). In contrast, the 37% bracket started at $647,851 in 2022.
- Down markets positively affect strategies to transfer taxable wealth through gifting or converting it into non-taxable wealth. If you expect markets to appreciate in the future—as we do—you supercharge future growth, which may not be taxed.
Taking advantage of today’s environment may require close coordination of planning, investments, charitable giving, and tax strategies. With access to AMG’s integrated and comprehensive wealth management solutions, an AMG advisor can help to realize the most benefits with the least leakage from implementing these strategies.
Income and Spending
There can be benefits to shifting income out into future calendar years and accelerating deductible spending to the current year. The key is to evaluate your unique situation and to maximize your tax deductions over both the current calendar year and next.
- What is your expected taxable income in 2022 and 2023?
- What will be your tax brackets in 2022 and 2023?
- Will you be making more than $200,000 modified adjusted gross income (AGI) as a single filer or $250,000 as a joint filer and have to pay the 3.8% surtax on new investment income?
- Is your cash flow sufficient to shift out current income?
- Are you financially secure and can take the risk of deferred income not being realized?
Even with these considerations, for many it will be helpful to maximize itemized deductions by shifting spending, investment losses, and gifts into 2022 and to lower 2022 AGI by shifting income into 2023.
Accelerating Deductions or Lowering Adjusted Gross Income
- Consider deferring income by having year-end bonuses or deferred compensation awards paid in 2023.
- Harvest capital losses in investment accounts to offset any capital gains and perhaps even create a tax-loss carryforward for future years.
- Pay your January mortgage bill in December, adding to the 2022 mortgage interest deduction (on up to $750,000 in debt).
- Pay your January property tax bill in December, adding to the 2022 property tax deduction (if you’re under the $10,000 cap).
- Schedule a medical procedure or buy medical products, if near or past the 7.5% of AGI threshold for medical expense deductions, and especially if you have expiring money in a flexible savings account (FSA).
- Max out your traditional 401(k) and IRA contributions, which will lower your AGI.
|Catch-up Contribution (if age 50 or older)||$6,500||$1,000|
|Contribution Deadline||December 31, 2022||April 18, 2023|
Required Minimum Distributions
- You generally have to start taking withdrawals from your IRA, SEP IRA, SIMPLE IRA, or retirement plan account when you reach age 72. The distributions are referred to as Required Minimum Distributions (RMDs). The year in which the taxpayer turns age 72, there is some flexibility on the timing of the first RMD. The first RMD must be made by April 1st of the year following the calendar year in which you reach age 72. If this currently applies to you, it may make sense to take the first year RMD before the end of the 2022 calendar year so that two RMDs are not recognized in 2023, potentially pushing the taxpayer to a higher tax bracket (the second RMD would have to be taken by the end of calendar year 2023). However, that may not be the case for every taxpayer depending on other sources of income. It is important to model this with projections for 2022 and 2023 and make the correct decision.
- Additionally, those 70 ½ years of age and older can transfer up to $100,000 yearly directly to charitable organizations. These qualified charitable distributions (QCDs) count toward RMDs, are not taxable, and avoid having income raised. They can also be helpful when individuals do not itemize yet wish to get tax savings from charitable gifts.
Maximizing Annual Gift Tax Exclusion and Lifetime Gift Tax Exemption
- In 2022, each taxpayer can gift up to $16,000 to any number of people they like without it affecting their lifetime gift tax exemption nor requiring a gift tax return. Your spouse can also gift the same amount, doubling the exclusion per household. This is a “use it or lose it” exclusion that expires each calendar year.
- If one exceeds the annual gift tax exclusions, over a lifetime each taxpayer can count those gifts against a $12,060,000 lifetime gift tax exemption without it triggering federal gift tax. Your spouse can also gift the same amount.
- The annual exclusion and lifetime exemption can be combined creatively to transfer a significant amount of wealth tax free—if gifts are structured correctly.
Maximizing Annual Gift Tax Exclusion
- Inclined to support a child or grandchild’s education? Paying tuition directly to the school is not taxable to the student nor does it count toward the annual gift tax exclusion. It does lower your taxable estate.
- Contributions to 529 plans also lower your taxable estate. They are considered completed gifts to the beneficiary and count against the annual gift tax exclusion in the calendar year when made. Contributions to a 529 plan are not deductible on federal taxes, yet may be deductible from some state income taxes.
- If funding a 529 plan, consider grouping five years of contributions into one tax year. By pulling forward the next four years of contributions into 2022, you could gift $80,000 per beneficiary. For example, if you have four grandchildren, you could gift $320,000 in 2022. Doing so now, in a down market, would remove those assets from your taxable estate and position those investments to grow tax-free in the future, if withdrawn for qualified education expenses. New rule changes to financial aid calculations effective in 2022 make grandparent-owned 529 plans more attractive as a multi-generational wealth transfer strategy.
Using the Lifetime Gift Tax Exemption
- A down market can potentially supercharge any gifts made today to individuals or irrevocable trusts where you expect future market appreciation. These gifts can be made with cash or low-basis property, such as stock or real estate. If a gift exceeds the annual gift tax exclusion, you will have to file a gift tax form; however, no taxes are owed unless it exceeds the lifetime exemption limit.
- Note, with the IRS using current inflation to adjust up the lifetime gift tax exemption for 2023, the maximum per person exemption will jump from $12,060,000 per person to $12,920,000 per person in 2023. If you have already maxed-out your lifetime exemption through long-term vehicles such as a SLAT (spousal lifetime access trust), you can top it up by an additional $860,000 in 2023.
Roth IRA Conversions
If your traditional IRA portfolio is down significantly in value and you are in a lower tax bracket in 2022, it may make sense to convert all or part of it to a Roth IRA. You would have to pay income taxes on the amount converted, net of non-deductible contributions, but future appreciation will be free of tax when withdrawn. It is not necessary to sell the investment with a Roth conversion.
Plan to Your Unique Circumstances
At AMG, we plan comprehensively, counseling each client on their unique circumstances, needs, and desires. Because of the clarity gained through our proprietary Financial Security Analysis, integrated tax projections and cash flow analyses, clients can make prompt and informed decisions and know that AMG can implement with confidence.
Contact an AMG advisor to discuss appropriate changes to your long-term financial plan, given the forward-looking environment.
2022 Contribution, Threshold & Exemption Amounts
Click here to view helpful information on deferred accounts and exemptions that we find clients ask for frequently.
NOTICE: This information is for general information use only. It is not tailored to any specific situation, is not intended to be investment, tax, financial, legal, or other advice and should not be relied on as such.