Tax Planning Isn't Over Until We Decide It Is
Written by: Ken Burke, CPA/PFS CBEC®
“What? Over? Did you say over? Nothing is over til we decide it is!” - Bluto Blutarsky Animal House 1978
Is it possible Bluto was referring to tax planning? Not a chance, but don’t miss the inspired message: "It ain't over." Tax planning isn’t over for 2022 just because we are two months into 2023. I admit, motivation for continuous tax planning can come from some unusual sources. I’ll take this inspired piece of advice from Bluto.
Let’s review strategies we can use between now and April 18, 2023, that could impact your 2022 tax liability and also strategies we can contemplate for 2023 and beyond.
Strategy #1: Get The Facts Straight
There is plenty of tax advice shared during tax filing season. I’m always open to hear the latest tax ideas. but many of them are not based in fact. Statements like “Rich people don’t pay taxes” aren’t correct and can create misunderstandings when it comes to tax strategy. The same is true about internet gurus claiming to have tax strategies that your CPA or tax lawyer don’t know about. Oh, and that the IRS doesn’t want you to know either.
Recommendation: vet these ideas with a competent tax professional.
Strategy #2: Saving For Retirement
The contribution deadline for Individual Retirement Accounts (IRAs), including Roth IRAs and Simplified Employee Pension Plans (SEPs), is April 18, 2023. If you have a SEP, the due date is either April 18, 2023, or the extended due date of your return, October 16, 2023, if your return was extended.
Strategy #3: Saving For Health Care Costs
If you are enrolled in a high deductible plan, you may be qualified to fund a Health Savings Plan (HSA). Like an IRA, the deadline for contributions is April 18, 2023. Unlike a SEP, you do not have until the extended due date of the return to complete your HSA funding. The funding limits are as follows:
- In 2022, you can contribute up to $3,650 if you have health coverage just for yourself or $7,300 if you have coverage for your family.
- At age 55, individuals can contribute an additional $1,000.
Strategy #4: IRA Rollover To HSA
You are allowed a one-time rollover from your IRA into your HSA subject to the HSA funding limits outlined above. This strategy is effective to jump start HSA funding and convert otherwise taxable income into non-taxable income provided you satisfy tax-free withdrawal requirements of an HSA.
If possible, you should consider leaving the funds in your HSA and fund your medical costs out of current income. This allows the account to continue to grow tax-free and increases the overall tax benefits of an HSA.
Strategy #5: Qualified Charitable Contributions (QCDs)
We posted an article outlining the benefits of QCDs here. If charitable giving is part of your annual planning, consider using QCDs as a strategy.
Strategy #6: Tax Bracket Management
We are in a historically low tax rate environment. In 1952, the highest tax rate was 92% on taxable income over $400,000. The Tax Cuts and Jobs Act is set to sunset after December 31, 2025, which means rates will be going up.
A planning focus is to fill up the lower tax brackets while rates are still low. For a married couple, the tax brackets for 2023 are as follows:
Percentage | Taxable Income |
10% | $22,000 |
12% | $89,450 |
22% | $190,750 |
24% | $364,200 |
For example, if you expect $150,000 of taxable income, you could consider recognizing $40,750 of additional income to maximize the 22% bracket. This could be done with strategies such as Roth conversions, IRA distributions, or realization of capital gains.
Strategy #7: 0% Tax Rate On Long-Term Capital Gains
For most taxpayers, long term capital gains are taxed at 15%. However, if your taxable income (2023) is less than $89,250 for married filers or $44,625 for single filers, some or all of your long-term net capital gains may be taxed at 0%.
The planning focus here is to control your income, if possible, and to choose to realize long term capital gains in the lower income tax years. If you are in retirement, you may be able to lower your income by choosing which accounts to take withdrawals or by using QCDs.
Here’s an example of how this might work:
Your taxable income, calculated after subtracting the higher or your itemized deductions or standard deduction, is $50,000. You are a married filer which means you have about $39,250 ($89,250 minus $50,000) of room for more income before you hit the 15% long-term capital gains bracket. If you own securities in a non-retirement account and some have unrealized long-term gains, you have a planning opportunity to realize some of the gains with no tax on the gain. Let’s say you have security that you purchased many years ago for $25,000. It is now worth $50,000. You can sell it, realize the gain of $25,000, and pay no taxes on the gain.
Summary
Tax management is an essential element of a successful retirement plan. Let’s face it, you can only spend and enjoy “after-tax” cash. We believe tax planning is a long game and suggest recognizing income today in our low-tax environment to better position yourself for the aggressive tax policy that we see on the horizon.
Our High Falls Advisors tax and planning teams can help you identify and utilize the above strategies where applicable. Since tax strategies are not a “one-size-fits-all," be sure to speak to your advisor or tax professional before making decisions on these and any other tax-saving strategies