2022 End of Year Wealth Planning

There are many planning strategies you can take before the year ends to help potentially reduce your 2022 tax liability and maximize your financial plan as we move into 2023. Most investment-related strategies must be complete by December 31, 2022, so it is important to act now.

In this guide, we provide many different strategies to consider according to you and your family's specific goals and financial situation. If you need any assistance thinking these through or implementing these, contact us.

Retirement

• Leverage any company matching programs. Consider maximizing employee contributions.

• Deduct annual contributions of up to $6,000 to your Traditional IRA and $6,000 to your spouse’s Traditional IRA.

• Take advantage of catch-up IRA contributions. Deduct the additional $1,000 in your Traditional IRA after a contribution if you are over the age of 50.

• Make a Roth IRA, backdoor Roth IRA, or mega backdoor Roth IRA contribution.

• Avoid penalized distributions from IRAs. Typically, withdrawals before age 59 1/2 would incur a 10% early withdrawal penalty (there are some exceptions).

• Consider a Roth conversion from your IRA or 401k if you are in a lower-income tax bracket. This could lower future RMDs or create tax-free income for beneficiaries.

• If you are a business owner or self-employed, maximize the use of a SEP IRA.

• Remember to take your RMDs if you are age 72+. Failing to do this can result in a heavy penalty.

• Access retirement funds early using 72(t) distributions. You can tap into your IRA before age 59½ without the 10% early distribution penalty if you commit to a series of withdrawals according to rules set out in section 72(t) of the tax code. You may need to act before December 31. Read more about these distributions in our blog.

Regular Investments

• If you’ve had life or employment changes, make any necessary adjustments to investment objectives and allocation.

• Explore tax loss harvesting (offsetting gains and losses), or just taking losses to reduce AGI and build loss carry-forward.

• Look to avoid mandatory mutual fund distributions (generally in the middle of December).

• Consider giving away appreciated assets to avoid capital gains and receive a potential income tax deduction. You can give directly or use a Donor-Advised Fund.

• Explore using ETFs in lieu of mutual funds to reduce the required annual mutual fund distributions.

Company Stock

• Review employer-provided stock grants and options for any vesting or expiration dates.

• If your portfolio is heavily made up of employer stock, consider diversifying to potentially reduce risk.

Medical

• If you are on a high deductible plan, maximize your Health Savings Account (HSA) for 2022.

• Use up your FSA, as most funds must be used within the same plan year. Don’t let it go to waste.

• Review your Medicare enrollment options. (Make sure the IRS has your current income information, particularly if your income has been reduced!)

Income Planning

• Consider deferring your year-end bonus, the sale of capital gain property, and receipt of distributions to defer income to the following year and reduce this year's taxes.

• On the other hand, consider accelerating any income potential if you anticipate higher taxes in future years.

• Manage your taxable income to qualify for the 199A Qualified Business Income (QBI) deduction, if applicable.

• If you have trusts, review distributions to ensure taxes are being minimized between the trust and beneficiary, where possible.

• If you are still working (and younger than full retirement age), consider deferring Social Security to avoid income taxes and potential benefit reduction.

Deductions

• In December, make your January mortgage payment (i.e., the payment due no later than January 15th of 2023) so that you can deduct the accrued interest for the current year that is paid in the current year).

• Consider making two property tax payments every other year to get the full SALT deduction when you itemize (note: these are capped at $10,000 per year inclusive of any sales tax deductions).

• Maximize the utilization of itemized medical expenses by bunching such expenses in the same year to meet the threshold percentage of your AGI.

• Consider using a Donor Advised Fund to bunch charitable giving and to capture deductions that may be missed with the standard deduction.

• Maximize contributing to your Health Savings Account(s), if possible, to reduce taxable income and access potentially tax-free growth.

Gifting

• Review the use of annual gift exclusions – currently $16,000 per individual recipient from each person.

• Directly pay for school and medical expenses for others outside your direct household using unlimited gifting exemptions.

• Fund a 529 Plan for a future student. You can even superfund up to five years (without using your lifetime gift exclusion) by gifting $80,000 (5 years x $16,000) per beneficiary in 2022.

• Consider intra-family loans to leverage low-cost loan structures.

• Sell highly appreciating assets to the next generation to lower future estate taxes.

• Plan ahead if your gift requires setting up a new account. The gift must be completed before year-end to count for 2022.

Estate

• Review your goals for transferring your assets.

• Ensure estate planning documents are in place and up to date.

• Review your beneficiary designations on all accounts.

• Evaluate the multitude of wealth transfer strategies with your advisor, CPA, and attorney.

• Communicate with your beneficiaries your goals and vision.

Charitable Giving

• Give an outright charitable gift of cash for an immediate income tax deduction.

• Itemizing deductions is only useful in reducing your tax bill if it exceeds the standard deduction.

• “Bunch” several years of charitable contributions into the current year to increase your itemized deductions and receive a tax benefit. This strategy is especially beneficial if you are having a higher income year.

• Donor-Advised Funds (DAFs) are useful tools for bunching as you can make a contribution now for an immediate income tax deduction and then distribute gifts to charities over time as you see fit.

• Contribute to charities using appreciated stock in place of cash to reduce capital gains in your portfolio while generating an income tax deduction. Donating appreciated stock creates a deduction of the full fair market value with no taxes on the appreciation, avoiding capital gains tax.

• Utilize Qualified Charitable Deductions (instead of RMDs) to donate to charity from your IRA – you can donate up to $100,000 under favorable tax provisions.

• If you’re selling a business/real estate or realizing significant gains this year, consider implementing a charitable strategy to reduce your tax bill.

• Collaborate with your children. This is a great opportunity to get children excited about charitable giving and to grow together as a family in your financial vision.

Cash Reserves

• Shop around for better rates. After years of offering essentially zero interest in money markets, savings accounts, and similar platforms, some banks are now offering higher interest rates to savers. If you have significant cash reserves, now may be a good time to compare rates and fees. Double-check fees and make sure your money remains FDIC-insured.

• Rebalance investments that are underweight in your portfolio with cash reserves. Many stock market prices have been depressed as well, so this may be an opportune time to “buy low,” if it makes sense within your investment plans.

• Watch out for variable interest rate loans and lighten your debt load. Carrying high-interest debt is a threat to your financial well-being, especially in times of rising rates. Consider paying off credit card balances, or at least avoid adding to them during the holiday season.

• Buy some I bonds. For cash that you won’t need for a year or more, Treasury Series I bonds may still be a good deal.

Life Changes

• What’s changed, and what hasn’t?

• Have you welcomed new family members or bid others farewell?

• Changed careers or decided to retire?

• Received financial windfalls or incurred capital losses?

• Added new hobbies or encountered personal setbacks?

• How might these and other significant life events alter your ideal investment allocations, cash-flow requirements, insurance coverage, estate plans, and more? Take an hour or so to list key updates in your life, so you can hit the ground running in 2023.

How can we help?

How else can we help you wrap up 2022 and position you and your loved ones for the year ahead? Whether it’s helping you define your personal goals, manage your investment portfolio, optimize your tax planning, consider your cash reserves, or assess any other components that contribute to your financial well-being, we stand ready to assist—today, and throughout the years ahead.

At Kings Path, we are passionate about helping clients define and pursue their financial goals in order to become more confident in their financial futures. Give us a call or schedule a meeting before year-end to discuss.