April Showers, Flowers and Strategies for a Better Tax Outlook Next TIme

My team partner, Kirsten Spacek, blogged this month about how much she LOVES April—mostly because it is her birthday! April does remind me of the beautiful springs we have in the southern US (sorry MidWest and New England), the early vibrant flowers, our blue bonnets in Central Texas, and usually beautiful weather. And April is also our annual US Tax filing deadline for most of us. So even though my blog usually focuses on fulfilling your legacy and charitable goals, since this is Tax Month (whew!), I will focus on how more effectively using tax aware and tax efficient strategies THIS year will make your April, 2023 tax filing leaving you with more money for your goals.  And some of our tax strategies include your charitable giving too! 

Last year, we had many proposed changes on the horizon that did NOT materialize—there was discussion of:

O Higher Ordinary income tax rates (only the IRS inflation adjustment was implemented)

O Higher Capital Gains Tax rates (this is still 0%, 15% and 20%)

O A decrease in Federal gift and Estate Tax Exclusion (this didn’t happen)

O An Increase in the SALT (State and Local Tax) Limitation (this is still $10,000)

O Elimination of the “Back Door IRA Roth”. Still available

O Elimination of the after-tax 401(k) Plan Conversion. Still Available

So that is good news for investor tax payers. Ordinary income and cap gains rates are still at a fairly low point in historical context. The estate tax exemption is still pretty high (in 2022 that exemption is $12.06 million per individual, for a married couple $24.12 million). Those who itemize and live in high tax states, the SALT (State and Local Tax) deduction is capped at $10,000. The Tax Cuts and Jobs Act of 2017 limited the amount of SALT deductions. Prior to the 2018 tax year, taxpayers could deduct an unlimited amount of state and local taxes on their federal returns. So for now, this limitation is still in place.

Let’s review some key facts for this 2022 relating to taxes:

Most filers use the standard deduction today which are:

MFJ (Married Filing Jointly): $25,900

Single: $12,950

Head of Household: $19,400

There are seven individual tax brackets:

10%, 12%, 22%, 24%, 32%, 35% and 37%

The annual gift tax exclusion is $16,000 for 2022

Annual Retirement Plan contributions are:

IRAs= $6,000, Age 50+ “Catch up” = +$1000

Employee limits for 401(k), 403 (b) and most 457 Plans=$20,500, Age 50+ “Catch up”=+$6,500

Some strategies to think about with your taxes for 2022 that could reduce the amount of money going to the IRS and potentially increase the amount of money you give to legacy or charitable interests include:

2022 Tax Aware Strategy One:  Tax Loss Harvesting Throughout the Year.  We have come out of a 10 year + bull run when there were scant opportunities to tax loss harvest.  First quarter of 2022 has given us some dips. Our team uses stock market dips to go in and harvest position losses that can be deducted up to $3000/year, off set with gains in any amount or banked for future bull markets when you will have gains.  Harvesting losses is simply turning unrealized market losses into realized market losses by trading.  Short term gains/losses can be offset with long term gains/losses.    Here is an example of how that works:

By moving money into a similar ETF, you can stay invested in the markets.  Be sure you don’t violate the Wash Sale Rule which applies to losses only, you cannot buy a substantially similar position within 61 days and this includes accounts at all of your institutions. 

 If you have questions, talk to us about tax loss harvesting or ask your advisor how she is doing that with your portfolio.

2022 Tax Aware Strategy Two:  Charitable Contributions. 

The first question to ask is, “ are you itemizing?” (Also see strategy #3 on bunching).  AGI (Adjusted gross income) limitation may be a factor, particularly for larger contributions.  Below is a chart on AGI limits with giving.

2022 Tax Aware Strategy Three:  Bunching Deductions

This strategy allows tax payers to alternate years using the standard deduction and an itemized deduction strategy by either deferring or accelerating expenses into one year in order to maximize the tax deduction.  Donor Advised Funds (DAFs) can be used for charitable contributions and then distributed on the donor’s timetable.    Here is an example of how that might work:

2022 Tax Aware Strategy Four:  Understand Required Minimum Distributions (RMDs)

Required Minimum Distributions are how the IRS (and sometimes states) receive tax revenue on those tax deferred retirement accounts with assets that have never been taxed.  Currently, at age 72, you are required to start taking some distributions annually from those accounts.  If you turn 72 years old in 2022, your deadline to take your first RMD is by or before April 1, 2023.  Your second RMD will be due on 12.31.2023 and each year end thereafter.  Penalties are substantial; 50% of the undistributed amount will be assessed.  Know that inherited IRAs are also subject to RMDs as well.

2022 Tax Aware Strategy Five:  Consider Qualified Charitable Distributions (QCDs)

Charitably-inclined investors who do not need all of their RMDs, may want to consider a direct contribution from their IRA to the charity.  In this contribution 100% of the value goes directly to the charity.  You may not take the distribution personally and then send it to the charity.  There are a few rules: 

• Must be at least 70½ years old at the time of the

Gift

• $100,000 limit per/year per IRA owner
• Can be used with inherited IRAs
• Can count towards RMD for the year if at least 72
• Cannot deduct as a charitable contribution but

distribution is not included in AGI which can allow individual to qualify for other tax benefits or avoid a higher Medicare premium.

2022 Tax Aware Strategy Six:  Tax Payments

Be aware of the requirements for tax payments.  There are three options:

• 90% of current year (2022) liability
• 100% of prior year (2021) liability (AKA Safe Harbor)
• 110% of prior year (2021) liability for individuals with over $150,000 AGI

Can be done via withholding and/or Estimated Payments

• ES payments due: 4/15, 6/15, 9/15 & 1/15 (4th quarter payments due January 15)
• Tips:
• If income/tax is down from 2021, 90% of current will likely be better
• If income/tax is up from 2021, 100% (110% if applicable) of prior year may be better
• No need to “pre-pay” IRS before tax bill is due, but be aware of 4/15 approx. tax due
• Review 4th Qtr. (1/15) payment to determine if necessary or needs adjustment

Additional considerations

• Complete your backdoor Roth conversion before December 31, 2022. Taxes must be paid on the conversion amount in the tax year converted but after that, the account grows tax exempt.  Roth Conversions are allowed by individuals of any income bracket but only one conversion per year is allowed. 
• Re-consider your future after-tax contributions to plans.  After-tax contributions to an employer plan in some cases can be converted to a Roth IRA (the Mega-Backdoor Roth conversion)
• Utilize strategies to reduce plan balance to below $10 million by 2029 (QCDs, additional distributions).  This hasn’t passed but may be on the table by future Congresses.
• Defer 4th quarter state income tax payment and property tax payments until after year-end (to the extent possible)

If you would like to discuss your family’s situation to consider tax aware investment and giving strategies, contact me spalombo@rwbaird.com or 713-296-8061

Disclaimers:

 Robert W. Baird & Co. does not provide tax advice. Please consult with your tax advisor.

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