Wealth Planning

Key Year-End Planning Considerations

Jody_King

By Jody R. King, JD, CPA

Vice President & Director of Wealth Planning

November 14, 2022

With the changing of the clocks and the closing of election season, it is nearly time to turn the page on 2022 and set yourself up for a bright 2023. Now is an opportune time to reassess your tax and financial circumstances and continue to take control of your finances by reviewing the following year-end planning tips:

1. Recognizing Losses and Taking Gains

Year-end is a good time to consider revisiting your capital gains for the year, especially in light of this year’s equity market volatility. If your portfolio contains unrealized losses, it may make sense to recognize at least some losses in order to decrease your overall capital gains tax burden or to allow you to take gains on other holdings. Please remember the “wash-sale” rule will not allow you to utilize a recognized loss if you repurchase the same or similar security within 30 days of the loss sale date. If you are concerned about being out of the market during the 30-day window, you could double up on the investment today and then wait and sell the loss shares some time at least 30 days after the purchase of the new shares. If you will be subject to the Massachusetts millionaire’s tax for state income tax purposes, you may want to consider delaying loss recognition until 2023 when they may have a greater tax benefit.1 Remember that for federal income tax purposes, net capital losses are limited to a $3,000 deduction amount against non-capital gains income, but excess losses can be carried forward indefinitely. Alternatively, you may wish to accelerate capital gains if you think gains recognized in 2023 could subject you to the Massachusetts millionaire’s tax.

2. Roth Conversions

Roth conversions are counterintuitive. Does it really make sense to pay taxes today to avoid taxes in later years? It certainly can. If you believe you will be subject to higher income tax rates in the future or if you are planning to pass an IRA asset on to your heirs, you may be better off converting some or all of your traditional IRA to a Roth this year. In exchange for paying taxes today on amounts converted, Roth IRA assets grow tax-free and, unlike traditional IRAs, are not subject to required minimum distributions (RMD), which generate ordinary income during your lifetime. Over an extended period of time, this benefit can be significant, especially in a higher-income tax rate environment. Since Roth IRAs benefit from tax-free growth, they can be most compelling for those who have a longer time horizon but can also make sense for those who have taxable estates. Additionally, a Roth IRA creates an income tax-free asset that can pass to heirs if the assets are not needed during your lifetime. Year-end is an excellent time to review your projected ordinary income for the year and understand the projected tax impact of any conversions based on where your actual taxable income falls within the marginal tax brackets structure. As a reminder, it is most compelling to pay the tax liability associated with a Roth conversion from assets that are not being converted in order to maximize the amount in the Roth IRA benefiting from tax-free growth. Please note that Roth conversions can no longer be recharacterized, or reversed, once completed.

If you are planning a multi-year Roth conversion strategy, and if future conversions could cause you to be subject to the Massachusetts millionaire’s tax, you may want to accelerate conversions to 2022.

3. Ordinary Income

Traditional year-end advice is to delay the recognition of income to the next year, if legally possible, in order to delay the payment of income taxes associated with it. Again, this may not be the best advice if you may be subject to higher income tax rates, including the Massachusetts millionaire’s tax, in future years.

Remember to take your RMD from IRA and retirement accounts before year-end if you are required to do so. This is generally necessary if you are over age 72 and the account is not a Roth account or an inherited IRA.

4. Itemized Deductions or the Standard Deduction

You will only itemize if the total of your itemized deductions exceed the standard deduction in any given year. The standard deduction increases annually due to inflation. For 2022, the current standard deduction is $25,900 for a couple that is married and filing jointly, $19,400 for head-of-household, and $12,950 for other individuals. These amounts increase to $27,700, $20,800, and $13,850, respectively, in 2023. In order to benefit from itemizing, itemized deductions must exceed the appropriate standard deduction amount. The state and local tax (SALT) deduction is limited to $10,000. To determine if you will itemize or utilize the standard deduction in a given year, you will combine your SALT deduction amount with deductible medical, charitable, and mortgage interest amounts. Even if you can itemize, the actual financial benefit from the increased deduction may be dampened by the Alternative Minimum Tax (AMT). Regardless, remember that home equity interest is only deductible if the loan proceeds were used for residential acquisition or capital improvements, and are subject to the overall home loan debt limit of $750,000 for residential debt incurred after December 15, 2017, and $1 million for pre-existing debt. The threshold for deducting medical expenses is 7.5% of adjusted gross income (AGI) for 2022.

5. Philanthropy

If you are over age 70½, you can make qualified charitable contributions (QCD) from your traditional IRA of up to $100,000 annually directly to a charity. QCD amounts can count as part of any required minimum distribution (RMD) for the year and do not result in taxable income to the IRA owner. QCDs cannot be made to donor-advised funds or most private foundations.

Donations of appreciated securities held for more than one year continue to be a tax-advantaged way to make charitable gifts, with current-year deductions limited to 30% of AGI for securities donations and 60% of AGI for cash donations to public charities and donor-advised funds. If the gift is to a private non-operating foundation, the limits are likely 20% of AGI for securities and 30% of AGI for cash.

If you are itemizing this year but may not be in future years, consider “deduction bunching” by accelerating what would be your 2023 or later years’ charitable gifts to 2022. If you are not ready to have the amounts gifted pass to charities immediately, you could also consider contributing to a donor-advised fund, which may allow you to receive the current-year tax deduction while retaining the flexibility to request that the donated funds be distributed to qualified charities of your choice during future years.

Learn More: “Minimizing Taxes with Charitable Gift Bunching”

Learn More: “Fiduciary Trust’s Donor-Advised Fund Program”

6. Tax Projections and Estimated Tax Payments

Review your 2022 income and itemized deductions to be sure that you have paid in sufficient amounts, either through withholdings, estimated tax payments, or prior year refunds carried forward, to avoid tax penalties. If you are planning to make estimated tax payments, the fourth quarter 2022 payments are due on or before January 16, 2023. If you would like your fourth quarter state or local tax payment to be included in your 2022 itemized deductions, then those payments must be postmarked before year-end.

7. Fully Fund Your 401(k)

While working, it is advisable to fully fund your 401(k) or similar retirement plan each year. Doing so will benefit you in the long run by maximizing retirement savings that grow either tax-deferred or tax-free and may help decrease your current tax liability. Even if your cash flow will not allow you to fully fund your plan, making contributions to at least maximize any available employer match is compelling. Maximum 401(k) contribution limits are $20,500 for 2022 and $22,500 for 2023, with those who are over age 50 allowed to contribute an additional $6,500 in 2022 and $7,500 in 2023. Depending on your situation, you may want to consider taking advantage of a Roth 401(k) feature if offered by your employer. Utilizing a Roth 401(k) will likely result in higher current income taxes, but will provide you with tax-free, as compared to tax-deferred, appreciation on any savings invested in your Roth 401(k).

If you do not have a 401(k) or are already fully funding your 401(k), consider funding an IRA. The $6,000 IRA contribution limit will apply for 2022 and increase to $6,500 in 2023, with an additional $1,000 contribution allowed in both years for those over age 50 by year-end. A non-working spouse with an employed partner can also fund their own IRA, subject to taxable compensation requirements.

If you are eligible, consider funding a Roth IRA instead of a traditional IRA. Roth IRAs grow tax-free and are not subject to RMDs, compared to traditional IRAs that grow tax-deferred and are subject to RMDs once you reach age 72. Please note that all 2022 traditional IRA and Roth IRA contributions must be made by April 15, 2023.

8. Annual Exclusion Gifts

If you have sufficient assets, and if transferring wealth to the next generation is a goal in your overall wealth plan, you should consider making annual exclusion gifts before year-end. Annual exclusion gifts can be a powerful wealth transfer technique over time. During 2022, an individual can give up to $16,000 to as many individuals as he or she chooses without utilizing any of his or her federal lifetime gift and estate tax exemption amount. That $16,000 combines to $32,000 for married couples who either make separate gifts or choose to “gift split.” Beginning in 2023, the annual exclusion amount will increase to $17,000 or $34,000 for married couples who gift split.

Contributions to a Section 529 Plan for education can be made with annual exclusion gifts. In fact, you can front-load a 529 Plan and elect to spread the gift ratably over a five-year period when you file your gift tax return. If you have a 529 Plan and have incurred unreimbursed qualified educational expenses, you should request reimbursement from the plan before the end of the year. Also, remember that up to $10,000 of elementary and secondary school tuition costs can be reimbursed from a 529 Plan each calendar year. Be careful not to overfund a child’s 529 Plan, and also be sure to meet your retirement savings goals before funding a 529 Plan.

Learn More: “Paying for College”

In addition to the annual exclusion gifts noted above, an individual can also pay tuition expenses and qualified medical expenses directly to the provider without creating a taxable gift. Tuition includes the cost of education from preschool through graduate school, but does not include non-tuition charges such as room and board or books. Qualified medical expenses include health insurance premiums.

9. Wealth Transfer Beyond Annual Exclusion Gifts

If you have significant assets, you should establish a comprehensive wealth-transfer plan that incorporates asset transfers both during your lifetime and at your death. This plan can include outright gifts or loans to family members as well as to your philanthropic interests. If you plan to eventually transfer assets into irrevocable trusts, now may be an appropriate time to begin working with your advisors to draft a well-thought-out trust with appropriate parties named as trustees. The current $12.06 million lifetime gift and estate tax exemption includes $6.03 million of basic exemption and $6.03 million of “bonus” exemption, with the “bonus” portion scheduled to sunset on December 31, 2025. Continuing to keep an eye on political developments is recommended here, as these amounts could be reduced before the current sunset timeline. It may make sense to establish a wealth-transfer plan. The 2023 exemption amount is scheduled to increase to a total of $12.92 million per person.

10. Health Plan, Health Savings, Flexible Spending, and Other Elections

The open enrollment period for Medicare plans, as well as that for most employer-based benefits, generally occurs during the last few months of a calendar year. Taking a moment to make sure your current elections are your best option for next year can be time well spent.

If you have a high-deductible health insurance plan, make sure you are fully funding your Health Savings Account (HSA). Funds put aside in an HSA do not need to be spent in that calendar year, but can instead be invested and used for future medical expenses. The HSA limit for 2023 is $3,850 for individuals and $7,750 for families. If you are over age 55, during both years you can contribute an additional $1,000, whether for an individual or family HSA. Please note that if an individual is over age 65 and enrolled in any part of Medicare, he or she is not eligible to contribute to an HSA.

In addition to making contribution elections for 2023 for either Health and/or Dependent Care Flexible Spending Accounts (FSAs), you should review the funds remaining in your FSA account before year-end and submit the necessary receipts for qualifying reimbursable expenses by March 31, 2023. Some plans allow you to carry balances forward to the new calendar year for future expenses, but others do not. Amounts remaining beyond the allowable carryforwards will likely be forfeited, so it is important to properly manage both the use of funds currently in your FSA as well as elections for future contributions. Maximum contributions to a Health Care FSA and Dependent Care FSA for 2023 are $3,050, and $5,000, respectively. If you have an HSA, please also make sure your Health Care FSA is HSA-compatible. An HSA-compatible Health Care FSA will generally limit reimbursement to items related to dental or vision expenses.

11. Estate Planning Documents and Beneficiary Designations

Year-end is also an opportune time to review your estate planning documents, including your will, revocable trust, healthcare proxy, and durable power of attorney, to be sure that the trusted parties named in the documents are still appropriate to serve and that the document terms reflect your current wishes. In addition, it is a good time to review your beneficiary designations to make sure any IRA, 401(k), or insurance policies name your recipients of choice. You should consider whether changes to the inherited IRA payout rules warrant a change to either your beneficiary designations or to the terms of any trust that is named as the beneficiary of your IRA or 401(k). In addition, it is recommended that you request inforce illustrations for any permanent life insurance products that you may own, so you can review the financial health of your policies.

Learn More: “Naming a Trust as IRA Beneficiary”

12. Wealth Planning Checkup

Most families are not fully aware of how much they spend. Year-end is an excellent time to review annual credit card, bank, and other statements in order to understand your current spending and assess how that fits in with your overall financial health. If you have debt, year-end can be a great time to review how you are managing it. If you have significant upcoming expenses, such as college tuition, year-end is an appropriate time to make sure you are on track to meet your funding goals. It is also an appropriate time to review your credit reports from the three major credit reporting agencies and consider freezing your credit. We find that our clients benefit from working with us to establish a wealth plan. This is a good opportunity to gather information to facilitate the preparation of a plan, with the goal of creating a basis from which you can make informed decisions.

 Learn More: “Identity Theft: What You Don’t Know Can Harm You”

Learn More: “Wealth Planning: Is Your Financial House in Order?”

As you consider your year-end tax and wealth planning, we encourage you to consult with your tax advisor to review the specifics of your situation. As always, you should also feel free to discuss these planning opportunities with your Fiduciary Trust officer. Please contact us if you would like to be introduced to one of our officers.

1 Beginning in 2023, Massachusetts will impose a 4% income tax on top of the state’s 5% flat tax rate for the portion of annual household income that exceeds $1 million. 

The opinions expressed in this article are as of the date issued and subject to change at any time. Nothing contained herein is intended to constitute investment, legal, tax or accounting advice, and clients should discuss any proposed arrangement or transaction with their investment, legal or tax advisers.

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