Year End Tax Planning & Financial Strategy for 2022

Year End Tax Planning & Financial Strategy for 2022

As 2022 comes to a close, hopefully we can all look back with gratitude and celebrate the holidays with family and friends, knowing that things have returned somewhat back to normal (at least relative to the prior two years). Now is a good time to review your financial and year end tax planning strategies to make sure you are on track to meet your meet your personal wealth management goals. While we cannot personally control things like inflation or stock market returns, it is important that we remind ourselves to focus on what we can control financially. Let’s explore several tips to help you with this.

Year End Tax Planning Strategies for 2022

If you get a raise or receive a bonus this year, consider increasing your retirement savings instead of spending it. Did you turn 50 this year? If so, take advantage of the catch-up provision. Employees aged 50 and over can defer an additional $6,500 to their 401(k), 403(b), or 457 plan in 2022, above the new $22,500 deferral limit (starting in 2023). IRA contributors aged 50 and over can save an additional $1,000 above the new $6,500 limit (also starting in 2023). Contributing as much as you can to your tax-deferred retirement accounts will not only provide you with more financial security in retirement but is also a great year end tax planning strategy which has the added bonus of reducing your taxable income for the year.

If you have a health savings account (HSA), consider maxing out contributions to that too (starting in 2023, $3,850 for individuals, $7,750 for families, and an additional $1,000 for individuals age 55+), as these contributions are also tax-deductible. Once you turn 65 and are on Medicare, you can also treat your HSA like a traditional IRA, and use the money for non-medical expenses.

Is your investment portfolio tax efficient? To the extent possible, hold bonds and REITs in tax-deferred retirement accounts. Bonds and REITs generate more income than other asset classes. Income generated in tax-deferred accounts is not taxed until you take a distribution, at which point you may be in a lower tax bracket.

Look for tax-loss harvesting opportunities. If any of your mutual funds have significant unrealized losses, consider selling them and using the proceeds to replace them with a very similar fund. This does not have any adverse effects on your portfolio but allows you to book the capital loss and use it later to offset future capital gains.

If you are currently in a lower tax bracket than you expect to be in later (for example, you are retired now but not taking Social Security benefits or doing required IRA distributions yet) consider doing Roth IRA conversions. You can convert traditional IRA assets to Roth IRA assets and pay the tax on the distribution at a lower rate now, versus when you are potentially in a higher tax bracket later. The money in the Roth IRA can grow tax free forever. Be aware though that you should aim to convert only enough to keep your income in the lower tax bracket and not cause some of your income to get taxed higher as a result of the conversion. You can no longer unwind Roth conversions. Also, if you do a Roth conversion before age 59 ½, avoid doing tax withholding, because that amount could be subject to an early withdrawal penalty. Please consult your tax or financial advisor before doing a Roth IRA conversion.

IRA owners age 70 ½ or older with charitable intent can donate up to $100,000 a year to a qualified charity, directly from their IRA. Known as Qualified Charitable Distributions, these satisfy the Required Minimum Distribution (which now do not have to start until age 72), and the distribution is not included as taxable income.

Hopefully, you will be able to take advantage of one or more of these year end tax planning strategies in 2022.

Cash Management

In an effort to fight high inflation, the Federal Reserve has raised the interest rate that banks charge one another for short-term loans. This increase gets passed on to us in the form of higher consumer lending costs like credit card interest rates and home mortgage rates. If you do have credit card debt, try and pay it off as quickly as possible before interest rates rise more.

The good news about higher interest rates is that you can get a higher yield on cash and cash equivalents for the first time in over a decade. For example, some liquid money market funds are yielding over 3%, and 3-12 month US Treasury Notes are yielding over 4% in annual interest payments. Aim to keep a minimum of 3-6 months of living expenses in cash to cover any unexpected emergencies or gaps in income.

For retirees, try to have at least one year’s worth of living needs in cash. This can help you avoid having to sell assets for a loss to fund your living needs, especially in a down market like 2022, when both stocks and bonds have been down significantly.   

Manage your Investment Portfolio

It is a good idea to invest your assets with specific overall allocation targets to stocks and bonds–60% stocks/40% bonds, for example. After a period of market growth or declines, your portfolio can drift out of balance. Take advantage of this by selling the assets that have done well and are up, and buying the ones that are down. Rebalancing your portfolio like this repeatedly over long periods of time ensures that you are buying investments at relative lows and selling at relative highs.

While we have enjoyed a slight rebound in stocks since the end of September, markets are still down for the year. If you have excess cash sitting on the sidelines, it could be a good time to invest it in broadly diversified, low-cost mutual funds while the market is still relatively down from its all-time highs.

Also, mutual fund companies tend to make their required annual earnings distributions in December. Try to reinvest the cash from the fund distributions and put your money back to work for you.Do you have old retirement accounts still at prior employers? Now may be a great time to consolidate them into an IRA to keep your assets organized in one place.

Other things to consider

Did you have any major life changes that might affect your estate planning or insurance policies? It is vital to have wills and medical directives in place. Make revisions to them if your life circumstances have changed this year. Also, look at your IRAs, 401(k)s and insurance policies and make sure your designated beneficiaries are up to date.

Does your life insurance coverage still make sense? Maybe you are self-insured with adequate personal investment assets and no longer need to pay expensive insurance policy premiums. Or maybe you need more life insurance coverage to protect your spouse and children, or liability coverage on your home and car. Don’t forget about disability coverage in case you are unable to work for long periods of time. Many employers offer this at reduced rates as part of their larger group plans.

If you have a 529 account, any individual can contribute up to $16,000 annually to the account without triggering gift taxes. Remember that 529 distributions must be made in the same year that the qualified education expenses are incurred.

Review your bank and credit card statements and ensure that all of your recurring expenses are still necessary.

Check your credit report. With the ongoing threat of identity theft, it is critical to review your credit at least every 12 months to make sure nobody has stolen your personal information and used it to open a credit card or take out a loan.

We hope you and your family find these year-end tax planning and financial planning tips useful. ML&R Wealth Management is here to help, so please reach out if you have any questions about your financial well-being. We wish you and your loved ones a very happy holiday season! 

About Author

Scott Adair, CFP®

Your wealth management goals are in good hands. Scott Adair hones in on your investment strategies and comes up with a plan that works for you. Scott is an Investment Advisor Representative and Certified Financial Planner (CFP®). His advice is tailored to each individual client.

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