Financial Insights

Planning Opportunities to Consider Before Year-End – Part 5

For the past four weeks, members of ACM’s Financial Planning Committee have been proactively curating articles to cover year-end planning opportunities including Required Minimum Distributions , Capital Gain Distributions , Roth Conversions and Charitable Contributions. For our final feature, we are going to fill in some of the blanks.

As in the past, most actions for tax-year 2022 must be made before Jan. 1, 2023. The main exceptions: Contributions to traditional IRAs, Roth IRAs and Health Savings Accounts for 2022 can often be made until April 18, 2023, next year’s tax deadline. Some self-employed taxpayers can make 2022 contributions to Solo 401(k)s until Oct. 16, 2023. Here are areas to focus on now:

Check withholding and estimated taxes 

Inflation has pushed the penalty on tax underpayments to 6%. On Jan. 1, it will likely rise to 7%, far above the 4% rate earlier this year. Check your withholding or quarterly estimated taxes, especially if your income has been uneven or included a windfall.

Most filers must pay 90% of their taxes from the previous year long before the April tax deadline to avoid the penalty. The due date is Dec. 31, 2022 for employees and Jan. 17, 2023 for those making fourth-quarter 2022 estimated payments.

Employees who raise their paycheck withholding late in the year often escape underpayment penalties for the entire year, and the IRS has posted a calculator to help figure withholding. Retirees and self-employed taxpayers must do their own assessments.  What if you’re headed for a big 2022 refund? Given IRS backlogs and snafus, consider lowering withholding or estimated tax payments to minimize headaches if the refund is delayed.

Should I take the standard deduction or itemize?

Assess your overall deductions. Filers can reduce taxable income by subtracting one overall amount called the standard deduction, or by detailing “itemized” deductions for mortgage interest, state and local taxes, charitable donations, medical expenses and others such as casualty losses as a result of Hurricane Ian.

For 2022, the standard deduction is $25,900 for married joint filers and $12,950 for single filers. Inflation has lifted the standard deduction amount for 2023—to $27,700 for married joint filers and $13,850 for single filers—something to keep in mind for planning purposes. (Filer’s age 65 or older get  $1,400 more, each, for 2022 and $1,500 more for 2023.)

Filers taking the standard deduction for 2022 or 2023 should evaluate whether it makes sense to “bunch” deductions to benefit from itemizing in some years. Often the best candidates for bunching are charitable donations. This move is harder for medical expenses, as many filers don’t have expenses greater than the 7.5% income threshold. For those who do, the service must be completed in the year of the deduction—so a parent can’t pay the full bill for a child’s orthodontia and deduct it for 2022 if the work isn’t finished until 2023.

Make a game plan for inherited IRAs  

This year, the IRS issued rules detailing required annual withdrawals from inherited IRAs. These rules only affect IRAs inherited in 2020 or later. The upshot: Heirs of traditional IRAs whose owners hadn’t begun required withdrawals by death and heirs of Roth IRAs have 10 years to empty the accounts, and annual payouts aren’t required during that period. Exceptions to the 10-year rule apply for heirs who are spouses, minor children (not grandchildren) of the IRA owner, and certain others.

Heirs of traditional IRAs whose owners had been taking required payouts also have 10 years to empty the accounts, with similar exceptions. But these heirs have to take required minimum payouts yearly. Based on a recent IRS notice, IRA specialist Ed Slott advises that heirs who are required to take annual withdrawals under the 10-year rule can skip them for 2021 and 2022. This doesn’t translate to being off the hook, but potentially delaying or deferring taxes for another year which may make sense for some folks but not all.

Doing gig work or selling online? Get ready for new IRS reporting rules 

Starting this year, many more gig workers and sellers who use platforms like eBay, Airbnb, Venmo and Uber will have earnings reported to the IRS on 1099 forms than in the past. The threshold for platforms and other payers to notify the IRS of payments is now $600, compared with at least $20,000 before the law changed. Many more payees will need to prove, if audited, why their sales of used clothes on eBay and Etsy aren’t taxable. Gig workers and platform sellers should be preparing for tax season by gathering records. Some may be behind already and need to catch up on quarterly estimated taxes for 2022.

It’s been five weeks of year-end planning information, and for some folks, it may be similar to drinking water through a fire hose. As always, if you have any questions or are unsure if an above or previous item applies to your specific situation, please do not hesitate to reach out to your ACM Wealth Advisor.

The foregoing content reflects the opinions of Advisors Capital Management, LLC and is subject to change at any time without notice. Content provided herein is for informational purposes only and should not be used or construed as investment advice or a recommendation regarding the purchase or sale of any security. There is no guarantee that the statements, opinions or forecasts provided herein will prove to be correct. Past performance may not be indicative of future results. Indices are not available for direct investment. Any investor who attempts to mimic the performance of an index would incur fees and expenses which would reduce returns. Securities investing involves risk, including the potential for loss of principal. There is no assurance that any investment plan or strategy will be successful.


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