With year-end quickly approaching, reducing taxes is on many people’s minds. It’s been a tumultuous few years, with many changes to people’s individual circumstances and tax laws at state and federal levels. Now is the time to focus on your year-end taxes and engage in estate and income tax planning opportunities.
At Fraser Trebilcock, our tax attorneys have made sure you don’t have to start your preparations from scratch with year-end tax considerations.
Estate and Gift Tax Planning
The IRS recently announced that, due to inflation, the estate tax exemption will be increased to $12.92 million for individuals in 2023 ($25.84 million for married couples), up from $12.06 million in 2022. Currently, the lifetime gift tax exemption amount tracks the federal estate tax exemption for decedents of $12.06 million (and $12.92 for 2023). Keep in mind, however, that the lifetime estate and gift tax exemption amount is set to be cut in half at the start of 2026.
If you’re thinking about beginning an annual gifting program, or want to continue a program you’ve already started, there are some things you should know. From an estate and gift tax planning perspective, the most commonly used method for tax-free giving is the annual gift tax exclusion. This method allows you to give up to $16,000 for 2022 (increasing to $17,000 in 2023) to each donee, without reducing your estate and lifetime gift tax exclusion amount. It’s also important to note that there is no limit to the number of people to whom you may make such gifts, and that the annual gift tax exclusion is applied on a per-donee basis.
Additionally, you and your spouse could choose to combine your exemptions into a single gift from either of you. By sharing in the gift of one spouse, married donors may double the amount of the exclusion to $32,000 in 2022, or $34,000 next year. This method of transfer could help you save family income taxes, where income-earning property is given to family members in lower income tax brackets, who are not subject to the “kiddie tax.”
Have children in college? Qualifying tuition payments may also be made or continued, in addition to medical payments. These amounts do not count against the annual exclusion limit.
Another thing to remember is that if you’re required to submit a written valuation in connection with your annual gifting program, you might be able to utilize a single valuation, for gifts made in December of 2022 and January of 2023.
Income Tax Planning
Since we know that everyone would love to potentially reduce their overall tax liability for 2022, it’s important to consider various income tax planning techniques before years’ end. When evaluating appropriate planning techniques, you should review the overall impact of any such planning for the two-year period of 2022 and 2023.
Traditional income tax planning options include the postponement of income until 2023, as well as accelerating deductions into 2022. This strategy might allow you to claim larger deductions, credits, and other tax breaks for 2022 that are phased out over varying levels of adjusted gross income (AGI). If there’s a chance you might be in a lower tax bracket next year, it may be advantageous to try to arrange with your employer to defer a bonus that you may be entitled to until 2023.
With regard to accelerating deductions, consider using a credit card to pay deductible expenses before the end of the year, including charitable contributions. This can increase your 2022 deductions, even if you don’t pay your credit card until after the end of the year. If you expect to owe state and local income taxes when filing your return next year, consider asking your employer to increase withholding of state and local taxes (or pay estimated tax payments of state and local taxes) before the end of the year, so that you might deduct those taxes for 2022.
Other common elements of income tax planning may also include selling capital assets (such as stock investments) for the purpose of generating a capital loss to offset any capital gains that you have already realized for the year. When considering year-end tax planning moves, it is also important to take into account the potential impact of such planning on the alternative minimum tax for 2022, so be sure to consult with your tax attorney.
If you’re on the higher end of income earners, be wary of the additional 0.9% Medicare tax that applies to individuals receiving wages with respect to employment in excess of $200,000 ($250,000 for married couples filing jointly and $125,000 for married couples filing separately).
Retirement Planning for 2022
It’s never the wrong time to put a little extra focus on your retirement planning, especially towards the end of the year as tax-saving opportunities continue. As a taxpayer, you still have the ability to convert funds in a traditional IRA (including SEPs and SIMPLE IRAs), §401(a) qualified retirement plans, §403(b) tax-sheltered annuities or §457 government plans into a Roth IRA. You also might want to consider converting money which is currently invested in depressed stocks (or mutual funds) into a Roth IRA if you are eligible to do so.
These are just a few of the year-end tax planning considerations that you can make before the calendar turns to 2023, so make sure to consider your options while you still have time. And don’t forget that your taxpayer circumstances are unique, so not all of these suggestions will benefit everyone. To ensure that your specific needs are considered, discuss any techniques with a qualified tax advisor before making any changes.
This alert serves as a general summary, and does not constitute legal guidance. Please contact us with any specific questions.
Elizabeth M. Siefker is an attorney at Fraser Trebilcock in the trusts and estates practice group focusing on estate planning, elder law, and business planning. You can reach her at firstname.lastname@example.org, or at 517.377.0801.