By David Peterson, Fidelity 


Key Takeaways


  • You may be able to do several things that could potentially help reduce your taxable income, maximize your charitable deductions, and reduce exposure to future taxes.

  • Understanding these possibilities can help you build enough flexibility into your plan to ensure that you are able to stay focused on your long-term goals and objectives.

  • Before making any decisions, be sure to consult with your tax advisor to make sure it suits your present circumstances and long-term strategy.

With the end of 2022 fast approaching, a little year-end housekeeping could help lower your taxable income, maximize your charitable deductions, and reduce exposure to future taxes.


Lowering Your Taxable Income


The end of the year is a great time to take stock of what opportunities are available to you and how you can use them to your advantage. Here are some ways you might be able to hang on to more of your hard-earned money:

Tax-loss harvesting

Investment losses can be used to offset any gains you’ve realized in 2022, or up to $3,000 of income on a joint tax return. Consider selling depreciated securities that no longer fit your strategy, have poor prospects for future growth, or can be replaced with similar investments that play a similar role in your portfolio.

Contributing to tax-advantaged accounts

Contributions to a 401(k), 403(b), or a health savings account could potentially lower your taxable income for 2022 and increase the assets you have available for future retirement and medical expenses. It’s good practice to review your contributions before year-end to ensure you’re taking full advantage of the limits for these accounts.


Maximizing Your Charitable Deductions


If you’re like me, your mailbox is probably filling up with letters from the charities you support asking for additional end-of-year contributions. Giving is inherently rewarding, but you may also want to consider ways to give tax-efficiently. Here are some tax-efficient giving strategies based on current law:

Bunching charitable contributions

It may be wise to make 2 or more years’ worth of charitable contributions in 2022 so you can itemize deductions versus splitting them over multiple years and taking the standard deduction each year.

Donating appreciated assets

If you are itemizing deductions, and you donate an asset held for longer than one year to a qualified public charity, you may be able to deduct the fair market value of the asset without paying capital gains on a sale, subject to a 30% adjusted gross income (AGI) limitation.

Making cash contributions

If you are itemizing deductions, remember that up to 60% of your AGI can be deducted for cash contributions made to qualified charities in 2022.


Reducing Exposure to Future Taxes


Year-end planning isn’t just about the here and now. There are several things you can do before the end of 2022 that could help reduce the impact of future taxes and provide added benefit to your beneficiaries or favorite causes:

Annual exclusion gifts

You can make gifts up to $16,000 to as many beneficiaries as you like, which can help reduce your estate’s value without using any of your lifetime gift and estate tax exemption.

Qualified charitable distributions

If you are age 70½ or older and have an IRA, you may want to consider making direct transfers of up to $100,000 from your IRA to eligible charities. This could potentially reduce the amount of current or future required minimum distributions. Additionally, a direct transfer does not increase your AGI, meaning it will not adversely affect your itemized deductions, Medicare premiums, or Social Security benefits.

IRA or 401(k) distributions

This may be worth considering if you have relatively low income in 2022, especially if you believe that tax rates will rise in the coming years.

Roth IRA conversions

There are 2 reasons you may want to consider this. Given how far stock prices have fallen this year, you may be able to convert more of existing investments without increasing your tax bill.

Additionally, in 2026, income tax rates will revert back to their 2017 levels provided there is no change to the sunsetting provisions of the 2017 Tax Cuts and Jobs Act. Those changes could have a significant impact on a family’s tax liability, which could make Roth conversions less appealing in 2026 and beyond.

Before you decide, however, understand that you will need to have other liquid assets available to pay the associated income tax due as a result of the conversion.


Keep a Long-term Perspective


While we can never predict the future with certainty, it’s never a bad thing to be educated on the possibilities of different outcomes. By understanding these possibilities, we can build enough flexibility into our plans to ensure that we’re able to stay focused on our long-term goals and objectives. Before you determine your next step, consult with your tax advisor and work together to identify the best approach for your specific situation.

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About LRPC’s Monday Morning Minute

Lawton Retirement Plan Consultants, LLC (LRPC) Monday Morning Minute is crafted to provide decision-makers with important information about the economy, investments and corporate retirement plans in a format that allows a reader to consume the information in less than 60 seconds. As an independent, objective investment adviser, LRPC has access to many sources of research and shares the best and most relevant information with its readers each week.

About Lawton Retirement Plan Consultants, LLC

Lawton Retirement Plan Consultants, LLC (LRPC) is a Milwaukee, Wisconsin-based independent, objective Registered Investment Adviser (RIA) providing investment advisory, fiduciary compliance, employee education, provider management and plan design services to employer retirement plan sponsors. The firm specializes in sustainable investment strategies for retirement plans that incorporate Socially Responsible Investment (SRI) factors and Environmental, Social and Governance (ESG) elements. LRPC currently has contracts in place to provide consulting services on more than a half billion dollars in plan assets. For more information, please contact Robert C. Lawton at (414) 828-4015 or bob@lawtonrpc.com or visit the firm’s website at https://www.lawtonrpc.com. Lawton Retirement Plan Consultants, LLC is a Wisconsin Registered Investment Adviser.

Important Disclosures

This information was developed as a general guide to educate plan sponsors and is not intended as authoritative guidance, tax, legal or investment advice. Each plan has unique requirements and you should consult your attorney or tax adviser for guidance on your specific situation. In no way does Lawton Retirement Plan Consultants, LLC assure that, by using the information provided, a plan sponsor will be in compliance with ERISA regulations. Investors should carefully consider investment objectives, risks, charges, and expenses. The statements in this publication are the opinions and beliefs of the commentator expressed when the commentary was made and are not intended to represent that person’s opinions and beliefs at any other time. The commentary does not necessarily reflect the opinion of Lawton Retirement Plan Consultants, LLC and should not be construed as recommendations or investment advice. Lawton Retirement Plan Consultants, LLC offers no tax, legal or accounting advice and any advice contained herein is not specific to any individual, entity or retirement plan, but rather general in nature and, therefore, should not be relied upon for specific investment situations. Lawton Retirement Plan Consultants, LLC is a Wisconsin Registered Investment Adviser and accepts clients outside of Wisconsin based upon applicable state registration regulations and the “de minimus” exception.