Thirteen moves that may help you optimize your 2022 return and set up for 2023.
Amanda Lott, Head of Wealth Planning Strategy, Advice Lab
Adam Ludman, Tax Advisory, Advice Lab
Tom McGraw, Head of Tax Advisory, Advice Lab
Jordan Sprechman, Practice Lead, U.S. Wealth Advisory
While taxes are inevitable, what you may owe might not be. That’s why we suggest you meet with your tax advisors as soon as possible to finalize your 2022 returns—and plan for 2023.
Often, your tax bill depends on a number of fluid factors, including: where you live, how old you are, what (and to whom) you give and whether you can (and do) benefit from available tax breaks.
But this year, you may be affected by some recently passed legislation. We suggest you speak with your tax advisors now to explore which of these 13 actions may suit your situation.
What might you do now about your 2022 tax bill?
Here are five actions to consider for your 2022 returns. Which work for you?
With a traditional IRA, you can contribute up to $6,000, or—if you were 50 years or older in 2022—up to $7,000 of your earned income. Moreover, those contributions are potentially deductible and, even if not, may be used for conversions to Roth IRAs and possibly doubled via a contribution for a non-working spouse.
- With a Roth IRA, subject to certain limitations, you can make non-deductible contributions up to the same limits for 2022 with the benefit that all growth, and future distributions, will generally be tax-free.1
- If you own a business that offers SEP or SIMPLE IRAs to employees, you have a grace period for making contributions to those accounts, based on the due date of the business’s or employer’s tax return, including extensions.
Trustees and executors have until March 6, 2023, to distribute income to beneficiaries and have those distributions treated as if they were made in 2022.
If a trustee has discretion over whether to make a distribution, the decision must be informed, always, by (a) the terms of the trust, (b) the trust’s income and transfer tax characteristics, and (c) the beneficiary’s best interests.
Only after weighing those factors should a trustee determine whether a distribution would make economic sense—as it often does. The marginal U.S. income tax rate of many trust beneficiaries (including even some whose income exceeds $500,000) is well below the top 37% tax rate, which is generally the rate that the trust would pay, as the tax brackets for trusts are compressed, at very low levels.2
If a trustee has discretion over whether to make a distribution, the decision must be informed, always, by (a) the terms of the trust, (b) the trust’s income and transfer tax characteristics, and (c) the beneficiary’s best interests.
Only after weighing those factors should a trustee determine whether a distribution would make economic sense—as it often does. The marginal U.S. income tax rate of many trust beneficiaries (including even some whose income exceeds $500,000) is well below the top 37% tax rate, which is generally the rate that the trust would pay, as the tax brackets for trusts are compressed, at very low levels.2
The Internal Revenue Service issued a notice late in 2020 stating that it intends to issue regulations saying pass-through entities (e.g., partnerships and S corporations) are exempt from the $10,000 deductibility cap on state and local taxes (SALT) at the entity level.
Check your state laws to determine whether pass-through entities in that state can elect to use this deduction. (Not all entities can or would want to make this election.) Many states require elections by March 15 for calendar year partnerships and such elections apply only to future tax returns.
Check your state laws to determine whether pass-through entities in that state can elect to use this deduction. (Not all entities can or would want to make this election.) Many states require elections by March 15 for calendar year partnerships and such elections apply only to future tax returns.
Have you directly (or indirectly, through a pass-through entity such as a partnership) realized short- or long-term gains during the last few months of the year on the sale of an asset? If so, you may have 180 days from the date of that realization (as determined under special QOF rules) to invest those gains in a QOF and defer (perhaps for several years) payment of taxes that would otherwise be due.
If you own an interest or shares in a pass-through entity that sold an asset early in 2022, the date of realization for that sale may be December 31 or March 15.3 Speak with your tax advisors to determine what the relevant date of realization is, and how to measure the 180-day period in your circumstances.
If you own an interest or shares in a pass-through entity that sold an asset early in 2022, the date of realization for that sale may be December 31 or March 15.3 Speak with your tax advisors to determine what the relevant date of realization is, and how to measure the 180-day period in your circumstances.
The general rule is that, to avoid penalties, private non-operating foundations must distribute at least 5% of their assets at least annually to public charities. But if needed, you may have as many as 12 additional months to make distributions, as there is, in effect, a 12-month grace period.
In other words, a private foundation with a December 31 fiscal year that is determined to have $1 million of assets and therefore a minimum distribution requirement of $50,000 as of December 31, 2022, has until December 31, 2023, to distribute that $50,000. A Donor Advised Fund (DAF) can be the recipient of the required distribution amount.
Check with your tax advisor to see what your private foundation’s final deadline for these distributions may be if the foundation’s situation requires more time.
In other words, a private foundation with a December 31 fiscal year that is determined to have $1 million of assets and therefore a minimum distribution requirement of $50,000 as of December 31, 2022, has until December 31, 2023, to distribute that $50,000. A Donor Advised Fund (DAF) can be the recipient of the required distribution amount.
Check with your tax advisor to see what your private foundation’s final deadline for these distributions may be if the foundation’s situation requires more time.
How will you pay your tax bill by the April deadline?
While tax returns are often filed on extension, tax payments must, in all but the rarest of circumstances, be made by the April deadline. So you may want, or need, to raise cash to make that payment. If that’s the case, what are your options?
Borrowing against your portfolio of marketable securities is a handy solution. Of course, borrowing has a cost. However, even though interest rates are higher, the cost to you may be relatively small. Indeed, the cost may be far outweighed by other considerations (such as not having to sell securities or other assets you’d prefer to keep—especially if you expect an influx of cash in the relatively near future).
You can’t deduct the interest on funds you borrow to pay taxes—but you can deduct the interest if you’re borrowing to invest, to the extent of investment income. So you might want to borrow to invest, and deduct the interest paid on those borrowings, meanwhile using cash from other sources to pay your taxes.
If you don’t want to borrow, review your holdings: If your portfolio has both unrealized gains and losses, consider selling holdings that would produce no net capital gains and using the proceeds to pay the taxes due.
You can’t deduct the interest on funds you borrow to pay taxes—but you can deduct the interest if you’re borrowing to invest, to the extent of investment income. So you might want to borrow to invest, and deduct the interest paid on those borrowings, meanwhile using cash from other sources to pay your taxes.
If you don’t want to borrow, review your holdings: If your portfolio has both unrealized gains and losses, consider selling holdings that would produce no net capital gains and using the proceeds to pay the taxes due.
This year’s changes
There are some issues and opportunities particular to this year that you may want to consider as soon as possible:
The amounts you can contribute to your 401(k) account increased in 2023 to $22,500 if you are under age 50, or $30,000 if you are over 50. Also: the combined amount your employer and you can contribute has risen to $66,000 or $73,500, respectively, depending on your age.
Further, a law enacted in the last week of 2022 provides that employees may now designate an employer’s matching contributions as Roth contributions, as long as the employee is 100% vested in any employer contributions.
Be sure that the withholdings from your pay are properly calibrated to account for those changes.
These figures also apply to self-employed defined contribution accounts. One new option for SEP and SIMPLE IRAs starting in 2023: Up to 100% of the contribution can be designated as a contribution to a Roth account, which is significant given the higher contribution limits for these plans.
In addition, if you’ll have a bonus (or other performance-based compensation) to set aside in a deferred compensation account, you may have only until June 30 to do so. Check with your employer to confirm your deadlines to make elections and to identify the maximum you might defer under the plan. Then, based on your cash flow needs now and in the future, you can decide what might be the appropriate amount for you to defer.
Further, a law enacted in the last week of 2022 provides that employees may now designate an employer’s matching contributions as Roth contributions, as long as the employee is 100% vested in any employer contributions.
Be sure that the withholdings from your pay are properly calibrated to account for those changes.
These figures also apply to self-employed defined contribution accounts. One new option for SEP and SIMPLE IRAs starting in 2023: Up to 100% of the contribution can be designated as a contribution to a Roth account, which is significant given the higher contribution limits for these plans.
In addition, if you’ll have a bonus (or other performance-based compensation) to set aside in a deferred compensation account, you may have only until June 30 to do so. Check with your employer to confirm your deadlines to make elections and to identify the maximum you might defer under the plan. Then, based on your cash flow needs now and in the future, you can decide what might be the appropriate amount for you to defer.
A law enacted in the last week of 2022 increased the RMD age from 72 to 73. This means that if you are turning 72 in 2023 and were expecting to take your first RMD this year, it is no longer necessary. You can start next year.
RMDs don’t have to be taken until December 31. However, if you turned 72 in 2022 and did not take your first RMD by December 31, then you must do so by April 1, 2023.
RMDs are based on two factors you already know—your age, and the balances in your tax-deferred accounts on December 31 of the previous year. But always check with your financial and tax advisors to plan for when you must take your RMDs.
Bond and equity markets were down in 2022. As a result, many taxpayers had to take RMDs from accounts with values that were a lot lower than at the start of the year. Still, we think it generally remains a good idea to wait until the end of the year to take RMDs, because asset values tend to rise.
But before taking your RMD this year, decide whether you want to make a QCD of up to $100,000 to a public charity. A QCD counts toward the RMD amount. (Starting this year, taxpayers can contribute $50,000 of a QCD to charitable remainder trusts or charitable annuities.) And unlike the rest of an RMD, the QCD amount is excluded from your gross income.
But please note: You can’t claim a QCD as an income tax charitable deduction. Also, the QCD cannot be made to a donor-advised fund (DAF) or any kind of private foundation.
RMDs don’t have to be taken until December 31. However, if you turned 72 in 2022 and did not take your first RMD by December 31, then you must do so by April 1, 2023.
RMDs are based on two factors you already know—your age, and the balances in your tax-deferred accounts on December 31 of the previous year. But always check with your financial and tax advisors to plan for when you must take your RMDs.
Bond and equity markets were down in 2022. As a result, many taxpayers had to take RMDs from accounts with values that were a lot lower than at the start of the year. Still, we think it generally remains a good idea to wait until the end of the year to take RMDs, because asset values tend to rise.
But before taking your RMD this year, decide whether you want to make a QCD of up to $100,000 to a public charity. A QCD counts toward the RMD amount. (Starting this year, taxpayers can contribute $50,000 of a QCD to charitable remainder trusts or charitable annuities.) And unlike the rest of an RMD, the QCD amount is excluded from your gross income.
But please note: You can’t claim a QCD as an income tax charitable deduction. Also, the QCD cannot be made to a donor-advised fund (DAF) or any kind of private foundation.
Despite 2022’s down markets, you likely still hold assets at a gain. It’s extremely tax-wise to donate public equities, in kind, to a public charity (or to a DAF, private operating foundation or private non-operating foundation). Here’s why—in addition to receiving a deduction based on the fair market value of the stock you donate, you also avoid tax on the unrealized gain on those equities.
That said, beware: Make sure you’ve held the donated stock, unhedged, for more than one year. (In rare cases, the holding period may be even longer when securities were received in connection with services performed as a partner for certain profits interests.) Also be sure the financial firm holding your shares donates the correct lot, and if that lot has ever been transferred from another firm, that the basis and holding period information is reported correctly from one firm to the other.
That said, beware: Make sure you’ve held the donated stock, unhedged, for more than one year. (In rare cases, the holding period may be even longer when securities were received in connection with services performed as a partner for certain profits interests.) Also be sure the financial firm holding your shares donates the correct lot, and if that lot has ever been transferred from another firm, that the basis and holding period information is reported correctly from one firm to the other.
Review your actual 2022 and anticipated 2023 tax bills to determine your minimum necessary quarterly estimated payments for this year.
If you are expecting outsized income in 2023, you may want to rely on the actual payments you made in 2022 to determine the estimated payments you make in 2023. This is because the law allows taxpayers to make estimated payments during the course of the year, interest- and penalty-free, up to whichever is lesser: (a) 110% of the prior year’s taxes, or (b) 90% of the current year’s taxes.
Thanks to this rule, you can keep more of your pre-tax income until the tax filing deadline in April of 2024 and invest that income safely—such as in U.S. Treasuries maturing before next April.
If you are expecting outsized income in 2023, you may want to rely on the actual payments you made in 2022 to determine the estimated payments you make in 2023. This is because the law allows taxpayers to make estimated payments during the course of the year, interest- and penalty-free, up to whichever is lesser: (a) 110% of the prior year’s taxes, or (b) 90% of the current year’s taxes.
Thanks to this rule, you can keep more of your pre-tax income until the tax filing deadline in April of 2024 and invest that income safely—such as in U.S. Treasuries maturing before next April.
Many taxpayers have moved since March 2020 in some part for the tax reasons. It requires a great deal of planning (and sometimes headache!) to establish domicile in the state to which you want to pay taxes this year. Ask your J.P. Morgan team for a copy of our Changing Domicile Checklist.
Also, it may be easier to switch where trusts that you’ve created are sited for tax purposes (which often differs from where it is sited for trust law purposes), so don’t forget to review those as well.
Also, it may be easier to switch where trusts that you’ve created are sited for tax purposes (which often differs from where it is sited for trust law purposes), so don’t forget to review those as well.
Consider making annual exclusion (up to $17,000 per donor, per donee) gifts earlier in the year so that any growth on these assets over the course of the year occurs off of your balance sheet.
Consider implementing a systematic program for harvesting capital losses for your securities portfolios. Doing so might help you to take advantage of any market downturns while avoiding the wash sale rules so adverse to taxpayers—and to bank those losses to offset either already realized, or expected future, capital gains.4
And while you’re reviewing your portfolio with an eye to harvesting losses, be sure to evaluate the tax efficiency of your holdings across all of your family’s accounts.
A key contributor to growing family wealth over time is making sure the proper accounts own the proper assets. For instance, where possible, have tax-deferred accounts own tax-inefficient assets, and taxable accounts own tax-efficient assets. Asset location can be as important as asset allocation to wealth growth and preservation.
And while you’re reviewing your portfolio with an eye to harvesting losses, be sure to evaluate the tax efficiency of your holdings across all of your family’s accounts.
A key contributor to growing family wealth over time is making sure the proper accounts own the proper assets. For instance, where possible, have tax-deferred accounts own tax-inefficient assets, and taxable accounts own tax-efficient assets. Asset location can be as important as asset allocation to wealth growth and preservation.
We can help
We keep our eyes on potential and enacted tax law changes at both the federal and state levels. We don’t expect the current Congress to pass any laws that would materially affect ordinary income or capital gains tax rates. However, we do expect some action in the next Congress, that is to say in 2025.
And, of course, the states could change their tax rates, as many did effective January 1, 2023.
There are many options you may consider for your 2022 taxes and to prepare for 2023 and beyond. Your J.P. Morgan team can assist in working with your tax advisors to help decide which options are the best suited for you.
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.
1The maximum a taxpayer may contribute directly to a Roth IRA is reduced, potentially to $0, if modified adjusted gross income is above certain thresholds. In addition, for all growth and distributions to be tax-free, taxpayers must meet certain requirements. See www.irs.gov for details based on your specific tax filing status.
2The top rate of 37% would apply to 2023 income in excess of $14,450 accumulated by a non-grantor trust. By contrast, the top 37% rate is reached by married taxpayers filing jointly only once income exceeds $693,750.
3The date of realization for that sale may be deemed to be either the end of the partnership’s tax year, generally December 31, or the year-end partnership tax filing due date, which is March 15.
4The wash sale rule states, in essence, that a loss will be disallowed if taxpayer sells a security at a loss and acquires the same or a substantially identical security (or an option on such security) within 30 days of either side of the date the loss was realized. The disallowed loss is added to the cost basis of the substantially identical acquired security and generally recognized when the position is later sold.
