Wisdom and Rubies

photo by Matt Cornelius
photo by Matt Cornelius

“It’s the most wonderful time of the year!” I can hear Andy Williams singing his signature Christmas carol—it is one of my favorites. “With the kids jingle belling and everyone telling you, ‘Be of good cheer,’ it’s the most wonderful time of the year!

There is no holiday season I enjoy more than I do Christmastime. The sights, the sounds, the smells—all invoke memories of past celebrations with family and friends and promises of those to come. Traditional remembrances, both secular and religious, round out the experience as the new year approaches. While December may bring visions of sugar plums to some and tidings of comfort and joy to others, it also offers a limited window of opportunity to review your financial position and pursue tax-savings strategies. You must act quickly and decisively, though, for your chance to affect change expires when the ball drops on December 31 and your tax year closes.

Here are some things you can do...

Defer income and accelerate expenses.

For 2022 and the foreseeable future, taxpayers will find themselves in one of seven ordinary income tax brackets: 10%, 12%, 22%, 24%, 32%, 35%, and 37%. Long-term capital gains (sales of capital assets held for more than a year) are taxed at rates of 0%, 15%, and 20%. Depending upon your current marginal tax rate (the rate you pay on an additional dollar of income), deferring receipt of income and delaying sales of capital assets until 2023 while accelerating expenses which qualify for deduction in 2022 may save you some money.

Evaluate capital gains net investment income.

If you have appreciated investments to sell, consider whether you have investment losses to harvest which might offset any gains. This may afford you the chance to take timely advantage of recent stock market volatility and possibly lower or completely eliminate any tax liability for capital gains. Beware of the net investment income tax, which is an additional 3.8% tax applicable to certain investment income earned when adjusted gross income equals or exceeds $250,000 for joint filers ($125,000 if married filing separately) and $200,000 for single taxpayers.

“Bunch” itemized deductions.

The 2017 Tax Cuts and Jobs Act reduced or eliminated many itemized deductions and substantially increased the standard deduction for all taxpayers. In 2022, the standard deduction is $25,900 for joint filers, $12,950 for singles and married couples filing separately, and $19,400 for heads of household. If these high thresholds eliminate the benefit of itemizing deductions for you, consider a “bunching” strategy to push or pull discretionary medical expenses and charitable contributions and the timing of property tax payments into the year where you will benefit from them the most. This may result in itemizing deductions in one year and then claiming the standard deduction in the next.

Optimize retirement plan contributions.

Contributions to 401(k) plans must be made by year-end. The maximum allowable 401(k) contribution for 2022 is $20,500, but if you are 50 or older and the plan permits, you may add as much as $6,500 as a “catch-up” contribution. You may also qualify to make deductible contributions to an individual retirement account ($6,000 or $7,000 if you are 50 or older) and a health savings account ($3,650 for self-only and $7,300 for families plus $1,000 “catch-up” contributions for individuals 55 or older). Both IRA and HSA contributions may be made up until April 18, 2023, the original due date of 2022 individual returns. If you are 72 or older, remember to take your required minimum distributions (RMDs) from qualified plans or IRAs to avoid imposition of substantial penalties. Up to $100,000 can be distributed directly from your IRA to a qualified public charity in satisfaction of your RMD, but no charitable contribution deduction for such distribution is allowed (because the distribution is not included in your gross income).

Weigh Roth IRA conversion.

If you have a traditional IRA, you may convert all or a portion of its content to a Roth IRA. This can be particularly beneficial if your IRA is invested in stocks or mutual funds that have lost value. The conversion will generate taxable income when it occurs, but the income earned within the Roth IRA and its future distributions will be tax-free, so long as certain distributions rules are followed.

Claim qualified business income deduction.

If you are self-employed, a member of a limited liability company, a stockholder in an S corporation or an owner of another pass-through entity, you can deduct 20% of your qualified business income, provided your taxable income does not exceed $340,100 for joint filers and $170,500 for all others

Expense new equipment.

First-year bonus depreciation equal to the cost of eligible equipment purchased before 2023 allows taxpayers to immediately write-off such property. In addition, $1,080,000 of qualifying Section 179 property placed in service in 2022 may be deducted when business income does not exceed $2,700,000.

Shift income with gifts.

The annual gift tax exclusion in 2022 is $16,000 per recipient, but gifts must be made before year end. You may achieve tax savings by transferring income-producing property to family members in lower income tax brackets who are not subject to the kiddie tax (dependent children under the age of 18 at the end of the tax year or full-time students younger than 24). Such gifts are not deductible by you, nor do they constitute income to the recipient.

In this current economic environment where you have no control over the rising costs of goods and services, where you are powerless to stop interest rates from rising or stock prices from falling, where you might choose to think Scrooge has come home to roost for Christmas, there is one source of financial pain over which you may still reign supreme: your 2022 tax liability. Do not dawdle in making wise choices to preserve as many rubies as possible, for timing is everything.

“It’s the most wonderful time of the year! There’ll be much mistltoeing, and hearts will be glowing when loved ones are near. It’s the most wonderful time of the year!”

God bless us, everyone!

Wisdom is better than rubies. —Proverbs 8:11
Wisdom may be better than rubies, but wisdom won’t pay the rent. —Fred

Freddy is an Assistant Professor of Accounting at Texas A&M University- Texarkana and an attorney Board Certified in Tax Law and in Estate Planning and Probate Law by the Texas Board of Legal Specialization. His practice is limited to matters of federal and state taxation, wealth transfer and asset protection planning, elder law, probate and the administration of estates, and the formation and operation of business, professional and nonprofit entities. You may find him at www.nortonandwood.com.

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