In preparation for the end of the year and the upcoming tax season, we summarized portfolio-related year-end tax and estate planning tips. Additionally, we have provided key metrics to consider with your tax professional and advisor.
Harvest Losses from Your Taxable Accounts Given this year’s bear market, selling securities for a loss (harvesting losses) may help reduce your tax bill now and in the future. Even if you held the securities for less than a year, losses from the sale of securities could shelter short-term and long-term capital gains realized this year from income tax. And any unused losses can reduce up to $3,000 of ordinary income. Keep in mind that capital losses are netted against all capital gains, including those from the sale of a business and real estate. You can carry forward any unused losses this year to help reduce your future tax bills. Note that you cannot deduct a loss on a security when a virtually identical one is purchased within 30 days of the original sale, as this is considered a wash sale. There may be significant planning opportunities this year specific to realizing losses. Consider contacting your Beacon Pointe advisor and your CPA if you think you may benefit from realizing capital losses prior to year-end.
Make Annual Exclusion Gifts to Family For those who want to continue helping family members if you have done so in the past or expect to gift or leave assets to heirs above the exemption amount, consider making annual tax-free gifts to loved ones. The 2022 annual exclusion allows you to make tax-free transfers of $16,000 per recipient in cash or property without reducing your ability to shield future wealth transfers from tax using your lifetime exemption. Additionally, these tax-free transfers do not require filing a gift tax return. Consider creative ways to give to your children and grandchildren, such as funding college or a loved one’s retirement. You could use the annual exclusion gift to fund a tax-advantaged Section 529 college savings plan. Or, if your children or grandchildren are working, your gift of cash might fund a Roth IRA to kick-start their retirement savings, compounding growth over a long period and creating tax-free income in retirement. In 2022, your employed children/grandchildren can use $6,000 of your gift to fund a Roth IRA, reduced by any other contributions to an IRA. To be eligible, your children/grandchildren must have earned at least $6,000 in 2022 and not more than $144,000 (single taxpayer). Gifting shares of stock or other investments can get them interested in learning about investing. If gifting cash, be sure checks are deposited before year-end to count for your 2022 annual exclusion. Read our piece on Financially Savvy Gift Ideas for other financially creative gifting ideas.
Maximize IRA and Retirement Plan Contributions Be sure to fund your retirement account to the applicable limit. The IRA funding limit for 2022 is $6,000 ($7,000 if over age 50), and the elective salary deferral limit to 401(k), 403(b), and 457 plans is $20,500 ($27,000 if over age 50). If you are a business owner, consider contributing to a SEP IRA or establishing and contributing to a Solo 401(k) by year-end. The contribution limit for SEP IRAs and profit-sharing/401(k) plans for business owners is 20% or 25% of compensation (depending on the business entity) up to a maximum of $61,000 for 2022 ($67,500 if over age 50). If you are a high-income taxpayer, deferring income could potentially allow the 20% qualified business income deduction on business income. The deduction may apply if the deferment of income brings your income below the highest income and capital gains tax rates.
Take Minimum Distributions from Retirement Plans After reaching age 72, the IRS requires that a minimum amount be distributed from retirement accounts annually. This also applies to certain inherited retirement accounts. It is important to take at least your full required minimum distribution (RMD) amount before year-end; the penalty for not distributing the minimum required amount is 50% of the amount required to be distributed but not withdrawn. RMDs are not required for Roth IRAs. The primary factors that determine whether an RMD must be taken from an inherited retirement account, as well as the timing and requirements, are as follows: (1) the date the account holder passed away, (2) the beneficiary’s relationship to the deceased account owner, and (3) the type of retirement account inherited. Working with your CPA is required to determine the amount of your RMD and the appropriate amount of income tax to withhold from your RMDs. For more information, read our pieces on FAQs About RMDs or So You’ve Inherited An IRA.
Consider a Qualified Charitable Distribution (QCD) If you are charitably inclined and over age 70½, you can donate up to $100,000 from an IRA directly to a qualified public charity (not a private foundation, donor-advised fund, or supporting organization) to both satisfy your charitable goals and prevent the distribution from being included in your taxable income. Making a direct donation from your IRA might lower your income and allow you to qualify for lower Medicare premiums and other income tax breaks. Note that contributing to an IRA after age 70 ½ reduces the amount transferable to a charity as a QCD. A QCD of up to $100,000 also counts toward your required minimum distribution for the year.
Gift Appreciated Securities or Cash to Charity If you plan to donate to charity this year, consider making your donation with appreciated stock or mutual funds you have held for more than one year. If you itemize your deductions, you will be able to deduct the full fair market value of the securities (limited to 30% of Adjusted Gross Income [AGI] for public charities, 20% for private charities, with the excess carried forward for five years). You will also avoid the capital gains tax you would otherwise pay on the sale of those securities. If you do not think you will itemize every year, it might make sense to bunch several years of charitable donations into one year using a donor-advised fund. A donor-advised fund allows you to take the income tax deduction this year but direct the fund to make donations to your chosen charities over many years. Please let your advisor know if you would like to gift securities from your accounts, as it takes some time to facilitate the transfer. Be sure to obtain a receipt as well as a written acknowledgment from the charity describing the donation and anything you received in exchange for it. For more information, read our piece on Thoughtful Charitable Giving.
Convert Your Traditional IRA to a Roth IRA There is even more reason to convert your IRA to a Roth IRA this year. If you believe your tax rate might be higher in the future because of either greater expected income or higher tax rates, or due to this year’s bear market, consider converting your Traditional IRA to a Roth IRA. A Roth IRA is attractive to those expecting higher taxes in the future because, unlike distributions from a Traditional IRA, qualified withdrawals from a Roth IRA are income-tax free. If the value of your IRA is lower than you expect it to be after the market recovers, you can convert it in-kind to a Roth IRA. You will pay income tax on today’s value and experience the recovery tax-free in your Roth IRA. A conversion might also help reduce your taxes over time because reducing the value of your Traditional IRA will reduce future RMDs, which might result in a lower tax rate. There is no free lunch, of course, as you will have to pay income tax on the amount you convert. The conversion typically makes sense if one or more of the following apply: (1) you have monies outside of your IRA to pay the income tax on the conversion, (2) you believe you will be in a higher income tax bracket later, (3) you are not planning on using the converted funds for several years to allow for tax-free compounding, or (4) you plan on leaving your IRA or Roth IRA to your heirs. Note that if you decide to convert to a Roth, you can no longer undo it later (as it used to be), so be sure to check with your tax professional before converting.
Tracking Cryptocurrency As more investors explore the world of cryptocurrency, it is necessary to understand the taxation of sales, transfers, and purchases. Currently, the online exchanges that offer cryptocurrencies, such as Bitcoin, do not report on transactions like other investment brokerage firms. This puts the responsibility on the taxpayer to track and report all transactions. It is important to track your cost basis of the purchase to help calculate future gains when the cryptocurrency is later sold. Know that exchanging one cryptocurrency for another is taxable as a sale and does not qualify as a tax-deferred exchange. Additionally, utilizing cryptocurrencies to purchase goods should also be reported as a sale. If you are an active trader or miner of cryptocurrencies, consider using software that will help track everything to make tax reporting easier. Currently, cryptocurrency losses are not subject to the wash sale rules, which means you could sell a position to realize a loss, then repurchase it immediately and still be able to recognize the loss. Be sure to let your CPA know if you have any cryptocurrency holdings so they can help you track and report everything.
Consider Investing in a Qualified Opportunity Zone (QOZ) Investing realized capital gains into a QOZ fund provides the opportunity to defer tax on capital gains realized within the last six months until December 31, 2026; also, it provides the opportunity for tax-free growth on any appreciation on the QOZ fund investment as long as you hold your interest for at least ten years. The law allows (1) federal tax deferral of capital gain invested in a QOZ until the earlier of when the fund is sold or December 31, 2026, and (2) federal tax avoidance on investment gain on the initial QOZ investment if held for at least ten years. If you have realized significant capital gains in the last six months, speak with your advisor about our approved QOZ fund. The QOZ fund manager and underlying real estate investments matter when taking advantage of the tax-free growth and to make up for the lack of liquidity. The capital gain deferred or avoided might still be taxable at the state level (four states, including California, do not conform to the federal QOZ tax law), and the federal income taxes will be due with the filing of the 2026 tax return. The deadline to reinvest capital gains realized is 180 days after the date the gain was realized. The investment does not have to take place in the same calendar year to qualify for deferral. Be sure to confirm timing deadlines with your CPA.
New Pass-Through Entity Tax Currently, 29 states (several more have proposals pending) have enacted a pass-through entity tax (PTET) since the Tax Cuts and Jobs Act limited the deductibility of state and local income taxes after 2017 until they are projected to sunset in 2026. The PTET allows taxpayers of flow-through entities to opt into paying state income tax on net income from the pass-through entity at the entity level, which reduces income for federal income tax purposes. For most taxpayers, this will reduce federal income taxes, similar to when state income taxes were fully deductible under the tax law prior to the TCJA. However, there are a few caveats, so it does not always make sense to opt in. Every state has different tax rates with their own nuances, so a call with your CPA is required to determine if this makes sense for you. The election must be made, and state income taxes must be paid before 12/31/2022 to benefit from the deduction this year.
Key Annual Metrics:
2022 Key Federal Itemized and Standard Deductions
The standard deduction is $12,950 for single filers and $25,900 for joint filers. If your itemized deductions exceed the standard deduction, you will itemize. Key itemized deductions:
- Up to $10,000 combined for state and local taxes paid (property tax, plus your choice of state income tax or sales tax)*;
- Mortgage interest for primary and secondary home loans up to $750,000; loans taken on or before 12/14/2017 up to $1,000,000*;
- Unreimbursed qualified medical expenses in excess of 7.5% of adjusted gross income; and
- Charitable donations.
*It is important to check with your CPA to understand whether your state has conformed to the 2017 Federal tax law. For example, California and New York have not conformed to the Federal law for itemized deductions. Both states, therefore, still allow a full deduction for property taxes, miscellaneous itemized deductions, including investment advisory fees, and mortgage interest on new loans up to $1,000,000. Investment advisory fees are federally deductible in calculating the 3.8% net investment income tax on investment income.
Important Disclosure: This report is for informational purposes only. Opinions expressed herein are subject to change without notice. Beacon Pointe has exercised all reasonable professional care in preparing this information. The information has been obtained from sources we believe to be reliable; however, Beacon Pointe has not independently verified, or attested to, the accuracy or authenticity of the information. Nothing contained herein should be construed or relied upon as investment, legal or tax advice. All investments involve risks, including the loss of principal. Investors should consult with their financial professional before making any investment decisions. Past performance is not a guarantee of future results.
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