2022 Tax Planning: 9 Strategies to Consider

By the time the tax filing deadline rolls around in April, it's too late to make changes that might reduce your tax liability for this calendar year. That's why now is the time to take actions that can help manage your tax liability.

For example, the SECURE Act changed how retirement plans were viewed for tax purposes. In March 2022, new regulations were proposed to specify whether required minimum distributions (RMDs) would be required for non-spousal inherited individual retirement accounts (IRAs). The proposed regulations, which are still subject to change, would require the non-spousal beneficiary to take RMDs over 10 years, based on their life expectancy, if the deceased IRA holder had begun taking RMDs before their death. Additionally, provisions of the CARES Act, which implemented additional tax savings through 2021, are no longer available for tax year 2022.

As you consider your tax liability, there are a number of potential tax strategies to consider, but remember, no specific plan works for everyone. You should speak with your tax advisor to determine which strategies may work best to help achieve your particular goals and objectives.

Consider these nine strategies before you file your 2022 tax return:

1. Contribute to Tax-Deductible or Tax-Deferred Accounts.

Making a contribution to a qualified 401(k) or health savings account (HSA) plan can reduce your taxable income. Individuals and married couples can make 2022 contributions to traditional IRAs, SEP-IRAs, SIMPLE IRAs and HSAs all the way up to April 15, 2023. Note that the extended timeframe does not apply to contributions to 401(k)/profit-sharing plans, which require contributions to be made during the calendar year, no later than Dec. 31, 2022.

Pre-tax contributions to a 401(k) are limited to $20,500 for 2022. However, workers 50 and older can make an additional $6,500 in catch-up contributions to their plans, increasing the maximum contribution to $27,000.

If you own a business or are an independent contractor, you may consider establishing a Simplified Employee Pension Plan or SEP-IRA. You can contribute the lesser of 25% of your compensation (including bonuses) or $61,000 ($67,500 if age 50 or older) to your SEP every year. You have until the date you file your taxes (April 15 or Oct. 15, if extended) to make the SEP contribution. These rules also apply to participants in profit-sharing defined contribution plans.

If you participate in a qualified high-deductible family health insurance plan, you can deduct up to $7,300 in contributions to an HSA in 2022. Individuals with self-only coverage can deduct up to $3,650. In addition, those aged 55 or older are eligible for an additional $1,000 catch-up contribution.


2. Consider a Roth Conversion.

One of the benefits of a Traditional IRA is that contributions are excluded from taxable income in the year they were made. However, all distributions from a Traditional IRA during retirement are taxed as regular income. In contrast, Roth IRAs do not provide an upfront tax benefit, but distributions taken during retirement from qualified Roth accounts may be received tax-free. In addition, Roth IRAs do not require you to take minimum distributions at a certain age, as Traditional IRAs do. Therefore, a Roth IRA may be especially beneficial if you wish to manage your taxable income during retirement.

If all or part of your retirement savings are currently held within Traditional IRAs, it is possible to move your Traditional IRA assets to a Roth IRA using a Roth conversion. While you'll have to pay taxes in the year of conversion on the entire converted amount, after five years you'll be able to make tax-free withdrawals from your Roth account.

If you are currently in a higher tax bracket, you may want to consider the impact of paying taxes on the converted assets versus the benefit of any market appreciation that may accrue in your Roth IRA in the future. A qualified financial or tax professional can help you understand whether the conversion process might make sense based on your circumstances. A tax professional can also help you calculate the ultimate cost of the conversion and ensure you are not inadvertently moved into a higher tax bracket as a result, if that is not your intent.

With the volatility of the stock market in 2022, the value of many IRAs decreased significantly this year. If you anticipate that the market will rebound over the next few years, taking advantage of the lower value of your IRAs is another reason to consider converting a portion of your Traditional IRA to a Roth IRA this year. The income tax payable upon conversion would be based on the lower valuation, causing a smaller income tax liability. In addition, any future appreciation may be received tax-free when distributions are taken from the Roth IRA.


3. Consider Deferring Income to Retirement or Accelerating Income to 2022.

If you believe you will be subject to a higher income tax bracket for this tax year, then you may wish to consider deferring some income to a later time, or even to retirement. You can do this through various nonqualified deferred compensation plans, such as a supplemental executive retirement plan (SERP), a defined benefit plan (such as a cash balance plan) or certain life insurance strategies that allow employees to defer income to a later year. The goal with any deferred compensation plan is to postpone income to lower your taxes in years where your compensation is high to a time when your taxable income will be lower (typically in retirement).

On the other hand, if your 2022 investment income is low due to market conditions, you may wish to accelerate income so it can be recognized when you're in a lower tax bracket. Income may be accelerated in various ways, including doing partial or total Roth conversions of Traditional IRAs (as discussed above) or exercising vested nonqualified stock options, which are treated as ordinary income.


4. Consider Repaying Early Distributions Taken From Qualified Plans or IRAs.

Typically, withdrawals from a tax-deferred retirement account made before age 59 1/2 incur a 10% early withdrawal penalty. However, the CARES Act eliminated that penalty for people who needed to make early withdrawals due to the coronavirus pandemic. Eligible individuals included those who were diagnosed with COVID-19, had a spouse or dependent diagnosed with COVID-19, or were financially impacted by the pandemic due to unemployment, reduced hours or similar circumstances.

Participants were allowed to withdraw up to $100,000 per person without being subject to the early withdrawal penalty. Any withdrawals were considered ordinary income subject to income tax, but distributions were included in income over a three-year period, starting with the year the distribution was received. For example, if you received a $30,000 COVID-related distribution in 2021, you could report $10,000 in income on your federal income tax return for 2021, 2022 and 2023, spreading the tax burden on the withdrawal amount over the same time period. Alternatively, you could have included the entire distribution in your income for 2021, the year of the distribution.

However, if you choose to pay your plan back for the amount of withdrawn funds within three years, then you may be eligible for a full refund of the taxes paid on the withdrawal. While the repayment would not change your current-year taxable income, you could be reimbursed for any taxes paid previously for the withdrawal amount


5. Wait to Purchase Mutual Funds.

It's a good idea to avoid purchasing mutual funds at the end of the year if the funds will be held in a taxable account. This is because buying a mutual fund immediately before its year-end distribution may result in an unexpected tax bill.

If you buy shares before Dec. 31, you could receive a Form 1099 for year-end dividends even if you did not own the fund when the dividends were earned. Part of the dividends would be treated as ordinary income, and part would be treated as capital gains.

Essentially, this means you could pay taxes on a profit from which you never received a benefit. To avoid paying additional taxes, speak with a tax or investment advisor before making a purchase to figure out when fund distributions will be made.


6. Harvest Capital Losses.

If you are an investor with large capital gains, consider talking with your advisor to determine whether harvesting capital losses may help you offset gains in the same year. If you own stocks with a built-in loss, you may sell them before the end of 2022 and deduct losses up to $3,000 against ordinary income on your federal tax return. If you held the stock for more than one year, then you may instead deduct your 2022 capital losses dollar for dollar against your 2022 capital gains.

As the end of the year draws closer, it's an excellent time to review your investments with your financial advisor and determine if you should sell stocks or other assets that are not performing well and reinvest the proceeds in new investments that may perform better.

When you do this, however, make sure you're not violating the “wash-sale rule." This law disallows you from taking a loss if you purchase the same or a very similar stock within 30 days before or after the sale of that stock was completed. Therefore, if you decide to sell a stock at a loss, consider adding a note on your calendar for when the 30-day period ends. That will remind you not to repurchase the stock too soon after it appreciates and inadvertently violate the wash-sale rule.


7. Consider Consolidating Your Charitable Contributions.

The Tax Cuts and Jobs Act of 2017 almost doubled the allowable standard deduction but eliminated and decreased some itemized deductions, including state and local taxes and mortgage interest deductions. One of the few itemized deductions that is still available and eligible to be fully deducted is the charitable deduction for gifts made in a calendar year.

The amount of charitable gifts you may claim as a deduction for a given tax year is based on the type of asset gifted, your adjusted gross income (AGI) and the type of charity receiving the gift. Any unused portion of the charitable deduction is carried forward for up to five years.

In 2022, if you donate cash to a public charity, including a donor advised fund or community foundation, you are entitled to take a charitable deduction against it, up to 60% of your AGI. For example, let's say a donor whose AGI is $200,000 provides a cash gift of $20,000 to a donor advised fund and makes no other gifts. In this case, the donor would receive in 2022 the lesser of $20,000 or $120,000 (60% of $200,000 AGI) as a charitable deduction.

Alternatively, if this donor makes a gift of $65,000 of appreciated securities to a public charity, the donor would be entitled to a 30% deduction against their AGI, or $60,000.

For the 2021 tax year, the CARES Act provided taxpayers who didn't itemize deductions the ability to take an additional $300 ($600 for a married couple filing jointly) federal income tax deduction for charitable contributions, which reduced both adjusted gross income and taxable income. This provision expired on Dec. 31, 2021, and unless Congress acts before year-end to extend the provision, it will not apply to the 2022 tax year.


8. Make Gifts to Family Members Before the Year's End.

For 2022, the IRS allows taxpayers to make gifts of up to $16,000 to any person without being subject to federal gift tax. For married couples, this annual exclusion from gift tax grows to $32,000 ($16,000 per spouse). If you plan to make gifts to family members, you will need to complete the gift before Dec. 31, 2022, in order to take advantage of the annual gift tax exclusion. If you do not use it, you lose it.


9. Meet With Your Tax Advisor to Discuss Specific Tax Strategies.

Congress did not pass new tax legislation in 2022 to dramatically change tax rules, but that does not mean you should avoid developing an income tax plan for the end of 2022 and beyond.

The provisions of the Tax Cuts and Jobs Act of 2017 are scheduled to sunset on Dec. 31, 2025, unless Congress passes new legislation that is signed into law by the president to extend it.

If the 2017 Act provisions expire, the following will occur:

Estate, gift and generation-skipping transfer (GST) exemptions would return to the prior exemption levels, indexed for inflation. This would be calculated as $5.49 million (the 2017 exemption amount), indexed for inflation, which is estimated to be around $6.1 million, approximately half of the 2022 exemption amount of $12.06 million.

Section 199A would no longer be available. This deduction allows non-corporate taxpayers to deduct up to 20% of their qualified business income (QBI), plus up to 20% of qualified real estate investment trust (REIT) dividends, and qualified publicly traded partnership (PTP) income.

The top income tax rate would increase from 37% to 39.6%.

You should consider these factors, along with your unique financial situation, when determining ongoing tax-savings strategies that might work for you. Consider meeting with your tax advisor now to help you understand how to best accomplish your specific goals for this year's tax season and beyond.

This article is for general information and education only. It is provided as a courtesy to the clients and friends of City National Bank (City National). City National does not warrant that it is accurate or complete. Opinions expressed and estimates or projections given are those of the authors or persons quoted as of the date of the article with no obligation to update or notify of inaccuracy or change. This article may not be reproduced, distributed or further published by any person without the written consent of City National. Please cite source when quoting.

City National, its managed affiliates and subsidiaries, as a matter of policy, do not give tax, accounting, regulatory, or legal advice, and any information provided should not be construed as such. Rules in the areas of law, tax, and accounting are subject to change and open to varying interpretations. Any strategies discussed in this document were not intended to be used, and cannot be used for the purpose of avoiding any tax penalties that may be imposed. You should consult with your other advisors on the tax, accounting and legal implications of actions you may take based on any strategies or information presented taking into account your own particular circumstances. Trust services are offered through City National Bank.