Avoiding That Surprise in the Spring

While the market volatility has been at the forefront of our recent discussions, we have seen an increasing number of our meetings spent on tax implications of different strategies. The projects we have worked on with clients this year highlight that tax planning is genuinely a year-round process. We have a little less than three months left in the year, but that gives us some runway to ensure that we do everything we can to optimize your wealth regarding taxes.

Some of the things our firm looks at could be as simple as revisiting the contribution limits to retirement plans and your deferral rate or as complicated as gifting to charities to maximize your deductions. A few of these tax events may be within your control, like buying and selling property or investments, while some may be out of your control, such as capital gain distributions from mutual funds. We understand that you all have unique plans, but I wanted to share a few of the concepts that have been helpful for others as we try to minimize the anxiety that can come with tax filing.

As a reminder, the contribution limits to 401(k) and Roth 401(k) aggregate contributions got a bump up in 2022 to $20,500, with the age 50+ catch-up moving to $6,500. Moving a total of $27,000 to your employer plan, whether you are trying to save on current taxes or add to future tax-free dollars, can substantially impact your plan. Unlike IRAs and Roth IRAs outside the employer-sponsored plan space, these contributions must be made in the calendar year. While the limits on the IRAs and Roth IRAs didn’t change for 2022, they are still $6,000 with the age 50+ catch up at $1,000; you do have until your tax filing deadline next Spring to make your contribution for 2022. Our recent retirees, many of whom don’t have traditional pensions, are in a lower tax bracket than they are used to. Couple that with the legislation change moving required distributions to 72, we have a window to do some tax planning and/or Roth conversions to take advantage of the room we have before hitting the next income bracket.

The world of non-retirement assets has its own set of tax treatments that can quickly alter your tax return and associated liability. Investment accounts and property have a cost basis assigned to them, which determines gain or loss, should the investment or property be sold. Volatility in the markets can present opportunities to “harvest tax losses.” For instance, an investment holding with an associated tax loss on paper is sold to better position an investment portfolio. That paper loss is offset by selling another position with a similar capital gain amount. We have utilized this approach often in 2022 to be less exposed to rising interest rates and gain more exposure to commodities while at the same time minimizing the total tax impact. We have also continued to implement exchange-traded funds (ETFs) as opposed to traditional mutual funds, partly to avoid larger than expected capital gain distributions that can sometimes disrupt planning. Capital gain estimates for mutual fund positions are typically posted at the end of October so if you have mutual fund holdings in non-retirement accounts, let’s look at the estimates and factor that into year-end planning.

Having a tax planning discussion now can leave you saying, “I’m glad I did that.” That is much more satisfying than missing out and having the “I wish I would have.” discussion.

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This content is developed from sources believed to be providing accurate information. The information in this material is not intended as tax or legal advice. It may not be used for the purpose of avoiding any federal tax penalties. Please consult legal or tax professionals for specific information regarding your individual situation. The opinions expressed and material provided are for general information, and should not be considered a solicitation for the purchase or sale of any security. (C) Twenty Over Ten