Tax Tips for Individuals

2022 Year-End Tax Planning for Individuals

Kim Delany

Do you wait until the last minute to file your taxes? If so, you're not alone because about onein three Americans procrastinate when filling out their annual IRS forms. Legislative changes and inflation make waiting to get your taxes in order seem like a wise option. However, for 2023, you'll need to consider how inflation will impact your returns. The higher your wages, the higher your tax bracket and tax percentage burden will be. Another factor to consider is how the midterm elections might result in tax changes being either included or excluded from December's budget reconciliation bill.

Procrastinating too long, however, has its disadvantages. The longer you wait, the more likely you will make an error on your return, face an audit, or even miss the deadline. These consequences are undesirable for every taxpayer, so it makes the most sense to streamline the process by prepping your taxes as much as you can before the tax year ends. Then you can make any last-minute changes in the final weeks before you file.

If you're currently sifting through this year's records and compiling your year-end tax documents and data, we've outlined some tips to help you organize and prepare for next year's taxes.

When in Doubt, Defer Here's a tip you'll want to take advantage of when you file your taxes next year. Of course, everyone is aware of the historically high inflation right now, but did you know that you could use these high rates to your advantage? You should consider deferring any income to 2023 rather than 2022.

Why? The tax brackets for 2023 will be higher because of the current inflation rates, which means you’ll be able to take advantage of these new rates if you defer your income. According to the IRS’s recent announcement, here are the new tax brackets for 2023:

• Income: below $11,000 individual, $22,000 married –Tax rate: 10% • Income: $11,000 individual, $22,000 married –Tax rate: 12% • Income:$44,725 individual, $89,450 married –Tax rate: 22% • Income: $95,375 individual, $190,750 married –Tax rate: 24% • Income: $182,100 individual, $364,200 married –Tax rate: 32% • Income: $231,250 individual, $462,500 married –Tax rate: 35% • Income: above $578,125 individual, $693,750 married –Tax rate: 37%

Tax brackets change yearly based on the annual inflation rates, but thanks to record inflation this year, 2023's adjustments are pretty drastic. This upward adjustment equates to an income tax cut because taxes will apply to less of your income, and you'll pay fewer taxes on the income that does get taxed. Remember, though, that these rates only apply to earnings after January 1, 2023. So, when in doubt, defer that income to 2023. Of course, every person's tax situation is unique, so it makes sense to consult with an accountant or financial advisor before you defer.

Itemize Charitable Contributions This tip might apply to your situation if you regularly contribute to charity. Over the past few years, the standard deduction taxpayers can claim has increased and is indexed for inflation, changing how many individuals itemize deductions on their tax returns.

When you file, you can either take your itemized deductions or accept the standard deduction, but you can't do both. Since the standard deduction has increased so much over the past few years, more taxpayers receive a more significant benefit from the standard deduction than the itemized deductions, including charitable contributions. Therefore, if you take the standard deduction, you do not receive any tax benefit for charitable contributions you made during the year.

One way to receive the tax benefit of charitable contributions and itemize your deductions is to consider bunching your charitable contributions into one tax year. For instance, you could bunch together both 2022's contributions and 2023's contributions into one year. By doing so, your itemized deduction might exceed the standard deduction, which will lead to a tax benefit.

Up Those Retirement Contributions Consider maxing out retirement contributions for the year before you file your taxes. While this option isn't always possible, it's great if you can afford it. Here's why: • Contributions to certain qualified plans are tax-deductible or are pre-tax, lowering your taxable income • Your employer might match your contributions depending on the terms of your retirement plan • Your overall tax burden may get reduced • You’ll enjoy the advantages of growing your retirement account tax deferred if it is a qualified plan

When contributing the maximum amount possible to your retirement accounts, one important consideration is how your employer will treat your contributions. In many cases, your employer will match your contributions dollar-for-dollar. However, other employers might match your amount by up to 50%.

Capital Losses Can Offset Gains Another practice you can benefit from is tax-loss harvesting. Before the end of the year, reposition yourself by identifying and selling any underperforming investments. Then you can use those capital losses to your benefit come tax time. How so? By using those losses to reduce your taxable capital gains. Generally, this is a good tactic in a year when you have significant capital gains. Additionally, you could offset up to $3,000 of your ordinary taxable income per year using any remaining capital losses.If the capital losses are not used in full in the current year, they carry forward to the next tax year.

Lower Your Account Value with a Qualified Charitable Distribution If you hold an IRA and you've reached the age of 72, you should know that you'll now be obligated to take a required minimum distribution (RMD), or a specific amount of funds from your account, every year. You'll have to take these funds even if you don’t need or want them.

When you receive these RMDs, it will increase your taxable income. In other words, these mandatory RMDs might kick you into a higher income tax bracket, limit your tax deductions, or even cause higher taxes on your Social Security income.

One way to avoid this situation is to use a qualified charitable distribution instead of accepting your RMD funds. In other words, you can fulfill your RMD requirement without receiving the funds as income by directly transferring the amount (up to $100,000) to charity. In addition, this qualified charitable distribution will not increase your taxable income.

Don’t Forget About Estate Planning Remembering your estate planning goals while prepping your end-of-year taxes is essential. You'll want to do whatever you can to minimize your estate tax liability in case the worst happens to you in the coming year. In addition, since tax laws are constantly in flux and the midterm elections could impact these laws, it is necessary to estate update your plans to reflect your estate planning goals.

Consider Your Children's Futures If you have children, you might also be interested in learning more about 529 plans. 529 plans allow family members, friends, and others to contribute to your child's college fund with after-tax income. These contributions are tax-free, and any earnings on themoney are not subject to another income tax when they get withdrawn by the student later for educational expenses. Although there is no federal tax benefit, depending on your state, you might be eligible for state income tax benefits on these 529 contributions.

Going Green Can Save You Some Green. The current administration has always touted the goal of making the country greener and more ecofriendly. The Inflation Reduction Act reflects that by allocating $1B towards loans and grants to improve climate resilience, water efficiency, and utility bill relief to those in need.

If you're a homeowner, you can take advantage of these new changes by installing energy-efficient upgrades to your home. These green updates will result in tax credits, ultimately cutting your tax bill. In addition, if you're considered a low- or moderate-income family per the bill, you might also be eligible to receive rebates for any energy-efficient appliances you purchase.

Now that 2022 is wrapping up, it's a greattime to prepare for 2023's tax season. But, of course, there's still a while before Tax Day in 2023, and the midterm elections might result in some tax changes, and there's a good chance that inflation will impact your taxes, too. So, with that in mind, you should revisit your tax situation before filing.

About the Author Kim Delany, tax services director, is well-respected for managingthe accounting and tax aspects of her client’soperations,sothey can focus on growing their business and becoming more profitable.Kim can be contacted at (610) 828-1900 or kim.delany@mccarthy.cpa.

Kim Delany