Autumn has just begun, and there’s still plenty of time to make some smart money moves to get ourselves in better shape before the end of the year. Many of the items we shared last year are valid for 2022, as well, but there are also some new updates this year. Please see below for a list of tips and recommendations to help you navigate around year-end planning and get ready for 2023.
One of the first things you should do is check to see if you’ve met any significant age milestones this year. Here are a few of the key rule changes, along with their corresponding ages:
Age 50: You can make ‘catch-up’ contributions to IRAs and some qualified retirement plans.
Age 55: You can take distributions from 401(k) plans without penalty, if retired.
Age 59 ½: You can take distributions from IRAs without penalty.
Ages 62-70: You can apply for Social Security benefits.
Age 65: You can apply for Medicare.
Age 70 ½: The QCD gifting strategy becomes available.
Age 72: You must begin taking RMDs from IRAs.
Charitable and Non-charitable Gifting
Anyone can give up to $16,000 to any number of individuals this year without having to worry about gift taxes or filing a “gift tax return.” For example, this means a married couple can give up to $32,000 to each of their children in 2022 if they desire. Sizable gifts above $16,000 are still not likely to be taxable but will require you to fill out IRS Form 709 along with your tax return. This form helps the IRS keep track of any reduction in your Lifetime Unified Federal Gift and Estate Tax Exemption, which is $12.06MM per person this year. Also, remember that gifts are generally not considered taxable income to the recipient.
Gifts made to charities may be deductible for you if certain conditions are met:
- The gift must be made to an IRS-recognized 501c3 organization.
- Total charitable donations are limited to 30% of your Adjusted Gross Income if your gift takes the form of property or securities. The limit is 100% of AGI if you donate cash.
- In order to deduct your charitable donations from taxable income, you must itemize your deductions rather than claim the standard deduction, which is $12,950 for single filers and $25,900 for married couples filing jointly in 2022.
- Charitable contributions that are not deductible this year (because of the AGI limits listed above) can be carried forward for up to five years.
And finally, if you are over age 70½, you may be able to take advantage of a Qualified Charitable Distribution (“QCD”) strategy, whereby gifts are made directly from a traditional IRA account and excluded from your taxable income. Please see your tax advisor for more information.
Offsetting Capital Gains with Capital Losses
Depending on your tax bracket and where your investment assets are located, you may be subject to capital gains taxes this year. However, since 2022 has been a challenging year for most investors, many taxpayers may find that they have unrealized taxable lossesin their brokerage accounts. Since the tax code allows realized losses to offset realized gains, you may be able to lower your 2022 tax bill by recognizing some of these losses in your taxable account. Capital gains tax is owed on the net realized gains at year end, which is calculated by summing up all realized gains and subtracting any realized losses. If realized losses exceed realized gains, losses can also offset ordinary income (up to $3,000) whether married filing jointly or for singles. Note that ‘excess’ losses can be carried forward to offset future gains indefinitely.
Making Contributions to an IRA, SEP-IRA or Roth Account for 2022
Not all year-end planning actions have a December 31 deadline. Making contributions to non-employer-sponsored retirement plans can generally be made up to the tax filing deadline of the following year. These would include traditional IRA accounts, ROTH accounts, and SEP-IRA accounts.
Be aware that there is an earned income requirement; contributions must be made from salary, wages, commissions, or otherwise “work-related” income. E.g. if your only income is from investments, pensions, and/or Social Security, you cannot make contributions to these kinds of retirement accounts.
The 2022 contribution limits are $6,000 for IRA or ROTH accounts, plus a $1,000 “catch-up” limit for those over age 50. The deadline for 2022 IRA and Roth contributions is April 15, 2023 (the general tax filing date), whereas the deadline for SEP-IRA contributions is your personal tax filing date, including extensions.
New IRS Rule Proposal Regarding Non-Spousal Inherited IRAs
The SECURE Act of 2019 revised the distribution rules for non-spousal inherited IRA accounts. IRA accounts that were inherited on or after January 1, 2020 became subject to the “Ten Year” rule, meaning the IRA account would need to be fully withdrawn within 10 years. It was initially believed that annual minimum distributions were not required, and the new account owner would have complete flexibility as to when those withdrawals would be made.
However, according to newly released IRS regulations, it now appears these non-spousal inherited IRAs are subject to annual Required Minimum Distributions (RMDs) if the original IRA owner were themselves already taking RMDs. (Note that the “Ten Year” rule still applies.). These distributions will be based on the life expectancy of the new beneficiary. Fortunately, the IRS is waiving any penalties for RMDs not taken from these accounts in 2021 or 2022.