Page 46 - BusinessWest December 12, 2022

Planning
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scheduled to phase out and end after 2023, is pre- served at 30% from 2022 through 2032 before phasing out.
2. The 30% ‘non-business energy property credit’ can generally be claimed for up to $1,200 of the cost of installing energy-efficient exterior windows, sky- lights, exterior doors, water heaters, and other quali- fied items through 2032 before phasing out. For 2022, the credit remains at 10% with a maximum of $500.
Miscellaneous
Pay a child’s college tuition for the upcoming semester. The amount paid in 2022 may qualify for one of two higher education credits, subject to phase- outs based on your MAGI.
Avoid an estimated tax penalty by qualifying for a safe-harbor exception. Generally, a penalty will not be imposed if you pay 90% of your current year’s tax liability or 100% of your prior year’s tax liability (110% if your AGI exceeded $150,000).
Minimize the kiddie-tax problem by having your child invest in tax-deferred or tax-exempt securi- ties. For 2022, unearned income above $2,300 that is received by a dependent child under age 19 (or under age 24 if a full-time student) is taxed at the top tax rate of the parents.
Empty out flexible spending accounts (FSAs) for healthcare or dependent-care expenses if you will forfeit unused funds under the ‘use-it-or-lose it’ rule. However, your employer’s plan may provide a carry- over to 2023 or a two-and-a-half-month grace period.
Make home improvements that qualify for mort- gage-interest deductions as acquisition debt. This includes loans made to substantially improve your principal residence or one other home. Note that the TCJA suspended deductions for home-equity debt for 2018 through 2025.
If you own property damaged in a federal disaster area in 2022, you may qualify for quick casualty loss relief by filing an amended 2021 return. The TCJA suspended the deduction for casualty losses for 2018 through 2025, but retained a current deduction for disaster-area losses.
FINANCIAL TAX PLANNING Capital Gains and Losses
Frequently, investors ‘time’ sales of assets like securities at year-end to produce optimal tax results. It is important to understand the basic tax rules.
For starters, capital gains and losses offset each other. If you show an excess loss for the year, it offsets up to $3,000 of ordinary income before being carried over to the next year. Long-term capital gains from sales of securities owned longer than one year are taxed at a maximum rate of 15% or 20% for certain high-income investors. Conversely, short-term capital gains are taxed at ordinary income rates reaching as high as 37% in 2022.
Review your investment portfolio. If it makes sense, you may harvest capital losses to offset gains realized earlier in the year or cherry-pick capital gains that will be partially or wholly absorbed by prior losses.
Net Investment Income Tax
Investors should account for the 3.8% tax that applies to the lesser of net investment income (NII) or the amount by which MAGI for the year exceeds $200,000 for single filers or $250,000 for joint filers. The definition of NII includes interest, dividends, capital gains, and income from passive activities, but not Social Security benefits, tax-exempt interest, and distributions from qualified retirement plans and IRAs.
Make an estimate of your potential liability for 2022. Depending on the results, you may be able to reduce the tax on NII or avoid it altogether.
Required Minimum Distributions
As a general rule, you must receive required mini- mum distributions (RMDs) from qualified retirement plans and IRAs after reaching age 72 (recently raised from age 701⁄2). The amount of the distribution is based on IRS life-expectancy tables and your account balance at the end of last year.
Arrange to receive RMDs before Dec. 31. Other- wise, you will have to pay a stiff tax penalty equal to 50% of the required amount (less any amount you have received) in addition to your regular tax liability.
Do not procrastinate if you have not arranged RMDs for 2022 yet. It may take some time for your financial institution to accommodate these transactions.
Conversely, if you are still working and do not own 5% or more of the business employing you, you can postpone RMDs from an employer’s qualified plan until your retirement. This ‘still working exception’ does not apply to RMDs from IRAs or qualified plans of employers for whom you no longer work.
Installment Sales
Normally, when you sell real estate at a gain, you must pay tax on the full amount of the capital gain in the year of the sale.
If you sell it under an arrangement qualifying
as an installment sale, the taxable portion of each payment is based on the gross profit ratio, which is determined by dividing the gross profit from the real- estate sale by the price.
Not only does the installment sale technique defer some of the tax due on a real estate deal, it will often reduce your overall tax liability if you are a high- income taxpayer. That is because, by spreading out the taxable gain over several years, you may pay tax on a greater portion of the gain at the 15% capital- gain rate as opposed to the 20% rate.
If it suits your purposes (e.g., you have a low tax year), you may ‘elect out’ of installment sale treat- ment when you file your return.
Estate and Gift Taxes
During the last decade, the unified estate- and gift-tax exclusion has gradually increased, while the top estate rate has not budged. For example, the exclusion for 2022 is $12.06 million, the highest it has ever been. (It is scheduled to revert to $5 million, plus inflation indexing, in 2026.)
In addition, you can give gifts to family mem- bers that qualify for the annual gift-tax exclusion. For 2022, there is no gift-tax liability on gifts of up to $16,000 per recipient (up from $15,000 in 2021). The limit is $32,000 for a joint gift by a married couple.
You may ‘double up’ by giving gifts in both Decem- ber and January that qualify for the annual gift-tax exclusion for 2022 and 2023, respectively. The IRS recently announced that the limit for 2023 is $17,000 per recipient.
Miscellaneous
Watch out for the ‘wash sale’ rule that disallows losses from a securities sale if you reacquire substan- tially identical securities within 30 days. Wait at least 31 days to buy them back.
Contribute up to $20,500 to a 401(k) in 2022 ($27,000 if you are age 50 or older). If you clear the 2022 Social Security wage base of $147,000 and promptly allocate the payroll-tax savings to a 401(k), you can increase your deferral without any further reduction in your take-home pay.
Weigh the benefits of a Roth IRA conversion, espe- cially if this will be a low-tax year. Although the con- version is subject to current tax, you generally can receive tax-free distributions in retirement, unlike taxable distributions from a traditional IRA.
Skip this year’s RMD if you recently inherited an IRA and are required to empty out the account within 10 years. Under new IRS guidance, there is no penalty if you fail to take RMDs for 2021 or 2022. The IRS will issue final regulations soon.
If you rent out your vacation home, keep your per- sonal use within the tax-law boundaries. No loss is allowed if personal use exceeds 14 days or 10% of the rental period.
Consider a qualified charitable distribution (QCD). If you are age 701⁄2 or older, you can transfer up to $100,000 of IRA funds directly to a charity. Although the contribution is not deductible, the QCD is exempt from tax. This may improve your overall tax picture.
Conclusion
This year-end tax-planning article is based on the prevailing federal tax laws, rules, and regulations. Of course, it is subject to change, especially if additional tax legislation is enacted by Congress before the end of the year.
Finally, remember that these ideas are intended to serve only as a general guideline. Your personal circumstances will likely require careful examination. Consult with your tax adviser. u
Save
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2023. The Social Security Administra- tion has announced an 8.7% cost-of- living increase for 2023. All recipients, including future recipients, will benefit from this raise.
It is imperative to understand that Social Security was never intended
to be the main source of retirement income for retirees. It was signed into law by President Franklin D. Roosevelt and was designed as a social insur-
ance program to provide a minimum amount of security to workers that have contributed. It has evolved over the years to provide disability, widow’s and children’s benefits for a deceased earner, and other benefits.
Many contributors wonder about the future of Social Security; this future will have to be addressed someday by our government. Currently, accord- ing to the Social Security website, the trust fund will run out in 2037. At that
time, current payroll tax collections will cover 76% of the benefits that will be paid out. Either benefits will have to
be cut, payroll taxes increased, or the age at which a worker becomes eligible increased — perhaps a combination of all three.
Take responsibility for saving for your own retirement and utilize the generous tax benefits that qualified retirement plans provide. u
Barbara Trombley, MBA, CPA is an owner and financial consultant with Trombley Associates. Securities offered through LPL Financial. Member FINRA/ SIPC. Advisory services offered through Trombley Associates, a registered investment advisor and separate entity from LPL Financial. This material
was created for educational and informational purposes only and is not intended as ERISA tax, legal, or investment advice.
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