By Chris J. Roe, CPA, PFS
Ideally, tax planning should be a continuous process undertaken all year long, possibly over multiple years, to achieve the greatest gain. However, it tends to be more top of mind at the end of the year when the time to take action to lower the current year’s tax burden is running out. Here is a list of a few tax planning strategies you may want to take advantage of as we approach the end of 2022.
- Shift ownership of business entities to lower-income taxpayers or entities. This may also help you take advantage of the Section 199A deduction, which allows qualified trades or businesses to deduct 20% of qualified business income, subject to certain limitations.
- Consider “bunching” charitable donations through a donor-advised fund (DAF), especially if you are in a high tax bracket this year and expect to be in a lower one in the future.
- Another reason to consider bunching donations: The $300 above-the-line charitable contribution deduction was not extended past 2021, so the only way to deduct your charitable contributions this year is to itemize rather than take the standard deduction. Bunching donations for multiple years into a single year will help you accumulate enough deductions to make that possible.
- If you have children in a lower tax bracket, hiring them to work for you in the business can be advantageous. You’ll receive a nice tax deduction for the salary you pay them, and they will pay little to no taxes on the income (depending, of course, on their tax bracket). For example, in 2022, your child will be exempt from Federal income tax for the first $12,950 of earnings. (Physicians, read my full article on the benefits of hiring your child here: Should I Hire My Child in My Physician Practice?)
- If you are considering selling your business before year-end or next year, consider setting up a defective beneficiary trust for your child in a lower tax bracket and gifting an ownership interest. This may allow for capital gains to be taxed in a lower bracket.
- If you are selling your business and you’re charitably inclined, consider contributing the shares of the business to a donor-advised fund or using a charitable remainder trust to defer gain. Note that if you are taxed as an S Corp, gifts to donor-advised funds come with special rules, and a charitable remainder trust is not an eligible shareholder.
- If your 2022 income is low, consider triggering tax on your accounts receivable to accelerate income into the low tax bracket year. Also, consider deferring your accounts payable until next year when you are in a higher tax bracket.
- If your business is generating a net operating loss this year, consider a Roth IRA conversion. The income created by the Roth can be offset by the net operating loss, and there’s no limit on the amount of income that can be offset. This can reduce or eliminate the income tax liability on the Roth.
- So long as you have no Traditional IRAs at the end of 2022, you can make a backdoor Roth IRA contribution.
- Make sure you are on track to maximize your 401(k) employee contributions of $20,500 if you are under 50 and an additional $6,500 if you are 50 or older for a total of $27,000.
- Evaluate your business retirement plan and see if it is designed to allow the owner(s) to maximize profit-sharing contributions.
- Consider if a cash balance plan is right for you and your business. This type of retirement plan allows for large tax deductions.
- If you are in a lower tax bracket than you expect to be in the future, you may want to consider contributing to a Roth 401(k) rather than a tax-deductible retirement plan such as a traditional 401(k). This way, you pay taxes on your contributions now at your lower tax rate.
- Consider converting a vacation home to a rental property. If the property is rented, and you later sell the home at a loss, you will get to claim a capital loss. Otherwise, the property is considered personal use, and capital losses are not allowed.
- Depending on your current tax structure, it may be beneficial to set up a complex trust to make charitable contributions from in the future. While individuals can only take a charitable contribution deduction of 50% of their adjusted gross income (AGI), complex trusts can deduct up to 100% of their net income.
- If you own mutual funds, check to see if you’ll be receiving any distributions this year, and if so, determine if it is more cost-effective to sell the mutual fund before the distribution.
- Evaluate the tax efficiency of your taxable portfolio. For greater tax efficiency, consider reinvesting any distributions or new cash using exchange-traded funds instead of mutual funds.
- If you are over 70 ½ and have not yet taken your required minimum distribution from your IRA for 2022, consider donating part of it to charity as a QCD – Qualified Charitable Donation. This allows you to reduce your AGI without having to itemize your deductions.
These are just a few opportunities to save tax dollars. Should you need advice on your personal situation or want to discuss a strategy you believe will work for you, please feel free to reach out for a free consultation.
While we are providing this as general advice, you should always consult your tax advisor or attorney before implementing any of these strategies.
Rx Wealth Advisors is a physician-focused financial advisory firm. Their primary focus is to help medical doctors maximize their earnings, keep more money in their pocket, and cultivate wealth so they can live the life they’ve earned and deserve. Rx Wealth can be reached at 412-227-9007, via email at email@example.com, or on the web at rxwealthadvisors.com.