*Please Note: No portion of the video content, or any amount of prior experience or success, should be construed by a client or prospective client as a guarantee that he/she will experience a certain level of results or satisfaction if NECFA is engaged, or continues to be engaged, to provide investment advisory services.
Hi this is Chris Beale founder and senior advisor at NE Capital coming to you at the beginning of December 2022 to tell you you still have time to save on your taxes this year, but you need to act soon.
Let’s start with tax loss harvesting. There is good news/bad news for capital gains this year versus last year. The good news is you won’t have as many taxable capital gains this year – bad news is you won’t have as many capital gains this year. Last year we were able to realize some gains before the market downturn. While we won’t see many capital gains this year, we were able to take some capital losses this year.
When we sell a security at a loss, we can use that loss to offset current or future capital gains. Plus we can offset up to $3000 of ordinary income like wages also.
There’s still time to do Roth conversion. A Roth Conversion allows you to transfer traditional IRA assets to Roth IRA. You pay ordinary income tax now but withdrawals from Roth IRAs are tax-free. We will use a tax bracket management approach to determine how much should be converted. For example, if a married couple has $70,000 in taxable retirement income, they are in the 12% tax bracket. We can convert $13,000 into a Roth IRA and still stay within the 12% bracket. Since the taxable earnings above $83,551 will jump them into the 22% tax rate. Any amount converted from a traditional IRA is money not subject to future required minimum distribution [RMD] rules.
Speaking of RMD rules, if you’re over 70 ½ (I know RMD rules now apply to people age 72 not 70 ½ ) but if you want to make a charitable contribution from your IRA the 70 ½ age still applies. So, if you’re 70 ½ or older, you can donate up to $100,000 from your traditional IRA directly to the charity or charities and the donation counts towards your RMD. There’s no deduction for the donation but the IRA withdrawal does not count as taxable income! This could cause a reduction in income which could possibly lower your Medicare premiums and allow you to take standard deduction while still providing for your favorite charities.
This is a great segway into comparing standard deduction versus itemized deduction. The standard deduction for 2022 is $25,900 for married filers and $12,950 for single filers. Remember there are no $600/$300 charitable donation deductions for 2022 like there were last year during Covid. Therefore “bunching” deductions can make some sense for taxpayers. For example, let’s say Abby and I normally donate $10K per year to charities. We have another $10K in other deductions for a total of $20k. We are better off using the standard deduction of $25,900. BUT what if we were able to take the standard deduction this year and “bunch” two year’s worth of donations next year? We get the standard $25,900 in deductions for 2022 then $30K itemized deductions in 2023. ($20K in charitable deductions and $10K in other deductions.)
Another tax break for charitable donations would be to donate appreciated assets. Let’s say you bought a stock or a fund that has greatly appreciated and would cause a large capital gain tax if you sold it. Don’t sell it and use the money to make your donation in cash. Instead donated the appreciated stock or fund to the charity. You get to deduct the full value of the donation. The charity would then sell the appreciated security and of course as a non-profit wouldn’t pay any tax on capital gains.
I’ll end with two last points. First, check to make sure you paid all quarterly estimates and your withholding is correct for your income, especially if you received a raise of a windfall this year. The penalty for underpayment was 4% earlier this year and due to inflation now at 6%, most likely going to 7% in January.
My second point has to do with what I talked about in my last blog. If you’re the beneficiary of an inherited IRA since 2020, let’s make a game plan to liquidate that account in the most tax efficient way possible within the new 10-year guideline. Remember the IRS requires beneficiary IRAs to be liquidated within a 10-year timeframe starting after January 2020. The IRS did give us a break if we didn’t take any distribution in 2020 and 2021 but not so going forward.
You are not required to be a tax expert. So, call our office and get your plan in place. We can help. We will work with your tax preparer to reduce your taxes.
Finally, don’t wait until the last minute next year – it typically doesn’t pay to procrastinate. Happy holidays from all of us at New England Capital.
IMPORTANT DISCLOSURE INFORMATION
Please remember that past performance is no guarantee of future results. Different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment, investment strategy, or product (including the investments and/or investment strategies recommended or undertaken by New England Capital Financial Advisors, LLC [“NECFA”]), or any non-investment related content, made reference to directly or indirectly in this blog will be profitable, equal any corresponding indicated historical performance level(s), be suitable for your portfolio or individual situation, or prove successful. Due to various factors, including changing market conditions and/or applicable laws, the content may no longer be reflective of current opinions or positions. Moreover, you should not assume that any discussion or information contained in this blog serves as the receipt of, or as a substitute for, personalized investment advice from NECFA. To the extent that a reader has any questions regarding the applicability of any specific issue discussed above to his/her individual situation, he/she is encouraged to consult with the professional advisor of his/her choosing. NECFA is neither a law firm nor a certified public accounting firm and no portion of the blog content should be construed as legal or accounting advice. A copy of the NECFA’s current written disclosure Brochure discussing our advisory services and fees is available for review upon request or at www.newenglandcapital.com. Please Note: NECFA does not make any representations or warranties as to the accuracy, timeliness, suitability, completeness, or relevance of any information prepared by any unaffiliated third party, whether linked to NECFA’s web site or blog or incorporated herein, and takes no responsibility for any such content. All such information is provided solely for convenience purposes only and all users thereof should be guided accordingly. Please Remember: If you are a NECFA client, please contact NECFA, in writing, if there are any changes in your personal/financial situation or investment objectives for the purpose of reviewing/evaluating/revising our previous recommendations and/or services, or if you would like to impose, add, or to modify any reasonable restrictions to our investment advisory services. Unless, and until, you notify us, in writing, to the contrary, we shall continue to provide services as we do currently. Please Also Remember to advise us if you have not been receiving account statements (at least quarterly) from the account custodian.