2022 Year-End Tax Planning Strategies

By Brian Seay, CFA

Founding Partner, Capital Stewards

The focus in Washington has been on the mid-terms, so there is not a slew of tax law changes for 2023 that require significant attention this year. However, given the steep declines in markets, 2022 does present us with some unique opportunities to reduce taxes. Remember, minimizing the taxes you own is a long-term game. Therefore there are long-term strategies, not “quick-tips” for 2022. Here are our top tax considerations as the end of the year approaches:

“It’s Only a Paper Loss If I Don’t Sell”

By holding on to losses in your portfolio past year end, you are losing real money to Uncle Sam. Losses in your investment portfolio can be used to offset other investment gains and even ordinary income in some situations. That means selling your losers will help reduce your tax bill. Selling and subsequently rebalancing is more important than ever as we end 2022. Steep losses in stock and bond markets have caused many portfolios to have too much cash. In conjunction with your tax loss selling, we recommend rebalancing your portfolio back to its long-term target stock and bond holdings.

Unique Opportunity for ROTH Conversions

For individuals with large balances in tax deferred accounts, this may be an ideal year to consider converting assets from an IRA or 401k to a ROTH. In a ROTH Conversion, you pay the taxes owed on the retirement account at the time of the conversion. Going forward, the account grows tax-free and distributions are not taxed as income. This is a unique year for conversions because losses have been so significant. Asset values are down, which means converting 100 shares of stock from an IRA to a ROTH will generate a lower tax bill than in prior years. Additionally, you may have losses elsewhere in your portfolio than you can use to offset some of the incremental tax bill.

Pay Taxes on More Income This Year!

Remember that taxes are a long-term game and that a solid tax strategy should reduce your total tax bill over time. Since asset prices are lower and you have losses to offset potential gains, consider accelerating income from next year into this year. You can use the losses to offset the extra income and lower your total tax bill. Additionally, you may consider selling assets with significant built-in capital gains now instead of waiting 2 or 3 years.

Smart Strategies for Stock Options and Company Stock

If you can choose when to exercise stock options, 2022 may be a good year to exercise. You may have losses elsewhere to help offset the additional income. Also, if you have ISOs (incentive stock options) now may be a good time to kick-off the 1 year holding period that’s required to receive preferential capital gains tax treatment after you exercise your options.

Charitable Giving from Your IRA

If you are already retired, and over age 70½, your IRA is a great source of funds for charitable contributions. Qualified charitable distributions (QCDs) from your IRA count towards your required minimum distribution (RMD) and the income is deductible as a charitable contribution. This is a great way to minimize taxable income in retirement if you have other sources of funds outside your IRA. So spread a little holiday generosity for others…and for yourself knowing your tax bill may be lower for 2022.