Now is the time for you to take steps that might minimize your tax bill.
Amanda Lott, Head of Wealth Planning Strategy
Adam Ludman, Tax Advisory, Advice Lab
Tom McGraw, Head of Tax Advisory, Advice Lab
Jordan Sprechman, Practice Lead, U.S. Wealth Advisory
Although we entered 2022 with a lot of uncertainty about potential tax law changes, very few of the proposals that would have impacted wealthy taxpayers were enacted.
In August, President Biden signed into law the Inflation Reduction Act. The Inflation Reduction Act focused on ramping up climate- and healthcare-related spending, and left out virtually all measures that would have directly raised tax rates on individual taxpayers.1
Now that there’s certainty about the tax landscape (until at least the end of the year and likely for a couple of years to come), taxpayers can plan with a high degree of confidence and try to minimize their 2022 tax liabilities.
We recommend you act now to determine what actions you might take before 2022 ends so that you will be best positioned financially when you file your return next year.
1. Start here: What’s your “base case”? You can find out now.
Your first step is to get a “pro forma” tax return from your tax advisor so that you can understand your current tax situation. From there, you can see what would happen if you were to realize more income or incur any additional deductions this year.
Consider asking your J.P. Morgan team for a “tax summary” to help with your tax estimates. With your tax snapshot in hand, you can better assess if it makes sense to implement tax planning strategies before year-end.
2. Can you reduce your 2022 tax liability?
Harvesting tax losses
Harvesting losses requires you to sell an investment at a loss. You then can use this loss to offset either already-realized gains, or embedded gains that you can realize now or in the future.
If you still like the asset, you can buy it back—so long as you are careful not to violate the “wash sale rule.” This rule prevents you from taking a loss if you buy a security considered “substantially identical” within 30 days before or after the loss trade date.3
If you do not want to be out of the position for an entire month, you might “double up” on your position (i.e., buy the identical position at the current price), then wait more than 30 days before selling the original loss position. November 29 is the last day to do so and still be able to recognize the loss in this tax year.Of course, tax-loss harvesting isn’t limited to year-end planning. Ideally, you would review your portfolio regularly for harvesting opportunities. Indeed, you might benefit from having an account that is specifically designed to constantly look for losses and take them when appropriate opportunities arise. For more information on tax-loss harvesting, see, “How can today’s market volatility be turned into tax benefits?”
Deducting charitable contributions
It is always advisable to try to time your charitable donations to ensure their associated deductions are effective in the intended tax year. Depending on what you plan to donate, it could take time to complete the transfer. Consult your financial institutions to understand estimated timelines to ensure your donations will be considered to have been made by the end of this year.
If you’re unsure which charity you want to support but would like the deduction for this year, you should consider donating to a donor-advised fund (DAF). Tax deductions for donations to DAFs are immediate, but the payout from the DAF to another charity does not have to be. For more information, click here.
3. Are you making the most of your compensation and benefits?
If you can contribute to a retirement account, we recommend doing so—up to the full amount permissible. The maximum annual amounts you can contribute to retirement accounts in 2022 before year-end are:
· IRAs—$6,000. If you are 50 or older, it’s $7,000
· 401(k)s/403(b)s—$20,500. If you are 50 or older, it’s $27,000
Converting assets from a traditional IRA to a Roth IRA may be a smart move if you:
· Think your future income tax rates may be higher
· Can afford to pay the taxes with cash from other sources
· Do not plan to leave IRA assets to charity
· Expect the IRA to last for a while
Taking required minimum distributions (RMDs)
Be sure to take your RMDs by year-end to avoid steep penalties.
If you’re charitably inclined, remember that you can make a qualified charitable distribution (QCD) from your IRA directly to a public charity (not a DAF), and the amount given will go toward satisfying your RMD.4
If you inherited an IRA after 2019, proposed Treasury regulations interpreting the SECURE Act would require certain beneficiaries to take annual distributions over the 10-year period after inheritance instead of waiting to distribute the full account until the 10th year. IRS guidance issued in October 2022 extends the effective date of this proposal until at least 2023. However, with the uncertainty that remains about this action, you should consult with your tax advisor to determine what you should do, given your situation.5
If your employer allows you to defer your compensation, you must elect to defer your 2023 fixed salary and other non-performance-based compensation by December 31, 2022, if not earlier as specified by the employer.
With a deferral, there is no income tax liability on either the compensation or its growth until you receive it. Then, the payment will be taxed at the ordinary rates in effect when you receive the funds. The tradeoff for this deferral is that you assume risk as a general creditor of the employer.
Once again, these types of decisions need to be taken in consideration of your expected current and future income tax rates.
Exercising stock options
If you are an executive, you may want to exercise some of your options in 2022.
The important question is: Which ones?
Good candidates generally include those options that:
1. Are deep-in-the-money;
2. Are on high-dividend-paying stocks; or
3. Have a short time to expiry
This year’s market volatility can make this decision more complicated, so reach out to your J.P. Morgan team for an “options breakeven” analysis.
4. Are you giving tax-wisely to your children?
Using your lifetime exclusion amount while it’s still high
Do you have a taxable estate, the capacity and desire to gift, and a lifetime gift and estate tax exclusion remaining?
Then you may want to use it now while the exclusion amount is at an all-time high. An individual can now transfer, tax-free, $12.06 million (married couples can transfer twice that).
This exclusion amount is set to decrease to $5 million (inflation-adjusted) after 2025, so think about acting soon to lock in the extra gifting potential.
Your J.P. Morgan team can help quantify your gifting capacity so that you can transfer assets without jeopardizing your own financial security in the future.
Putting your annual tax-free gift to good use
Every year, most U.S. taxpayers also have the opportunity to give, without any gift taxes due, an “annual gift tax exclusion” amount to as many individuals as they choose, and for whatever present use. This year, it’s $16,000; for married couples, it’s $32,000.
The annual gift tax exclusion is a “use-it-or-lose-it” opportunity; if you don’t make a gift this year, you can’t “double up” next year and have half the gift treated as having been made this year.
Parents and grandparents often use their annual gift tax exclusions to fund 529 accounts, where the funds can grow free of federal taxes. As long as the money is used for the account beneficiary’s qualified education expenses, no federal income or gift tax will be due on distributions.
5. Are you getting the help you need?
These are just a few examples of the many opportunities you may have right now to strengthen your financial health before year-end.
Speak with your tax advisor about which actions may be right for you. You also can ask your J.P. Morgan team to work with your tax advisor to help you evaluate how any actions you might take would align with your long-term financial goals.
The sooner you have these discussions, the more benefit you may be able to reap from your year-end planning.
For a deeper dive into year-end tax planning, see our full checklist, “Your 2022 Tax Guide."
1 The Act does include provisions to: (1) levy a 1% excise tax on publicly traded stock buybacks (effective after 12/31/22); (2) extend a provision that limits the use of “excess” business loss deductions through 2028; (3) enact a 15% alternative minimum tax on large corporations (effective after 12/31/22); and (4) increase the Internal Revenue Service’s budget by almost $80 billion over the next 10 years. If you want to learn more about the Inflation Reduction Act and our tax outlook, ask your J.P. Morgan team for our “Outlook for Tax Law Changes: Inflation Reduction Act Highlights.”
2 Please consult your tax advisor to see if tax-loss harvesting is available with your accounts and how potential buybacks may be done successfully. Taxes should not be the only factor to drive an investment decision.
3 Internal Revenue Code Sec. 1091. Before acting, please be sure to discuss your potential buybacks with your tax advisor. Proposals were made in Congress last year to expand the scope of assets subject to the wash sale rule beyond “securities.” These proposals did not pass, so at this time, the wash sale rule still does not apply to assets—including foreign exchange, commodities such as gold, and digital assets such as cryptocurrency—that historically fall outside the scope of the rule.
4 Up to $100,000 per taxpayer. The amount going to the charity is not considered income to you; on other hand, you would not be able to deduct that amount as a charitable donation.
5 The proposed Treasury regulation would apply to “non-eligible designated beneficiaries” (non-EDBs) of a decedent who was required to take RMDs. Non-EDBs include designated beneficiaries other than: 1) decedent’s spouse; 2) decedent’s minor children; 3) someone who is chronically ill or disabled; or 4) a person who is no more than 10 years younger than the decedent.
JPMorgan Chase & Co., its affiliates, and employees do not provide tax, legal or accounting advice. This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for tax, legal and accounting advice. You should consult your own tax, legal and accounting advisors before engaging in any financial transaction.