Erin Shaw
Finalizing your taxes from the year before can be an arduous task, but in planning ahead you can take steps to improve your tax return. Taxes are inevitable, however what you may owe might not be.
Your tax bill depends on a number of fluid factors, including: where in Indiana you live, how old you are, what (and to whom) you give, and whether you can (and do) benefit from available tax breaks. Congress may pass changes to the tax law in 2022, by speaking with a tax advisor you can identify which actions make sense now to explore based on your individual situation.
Here are eight key actions to consider as you finalize your 2021 taxes and plan ahead for 2022.
- Maximize contributions to all tax-deferred accounts – The amounts you can contribute to your 401(k) account increased by $1,000 in 2022 (up to $20,500 if you are under age 50, or $27,000 if you are over 50). Also, the amount your employer and you can contribute has risen by $3,000 (to $61,000 or $67,500, respectively, depending on your age).
You’ll need to make sure that the withholdings from your pay are properly calibrated to account for those changes. 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 30th to do so, so check with your employer to confirm the deadlines.
- Consider required minimum distributions (RMDs) and qualified charitable distributions (QCDs) – Before you take your RMDs this year, decide whether you’d want to make a QCD of up to $100,000 to a public charity, in place of all or part of your RMDs. Unlike an RMD, the QCD amount is excluded from your gross taxable income. Note that you can’t claim this QCD as an income tax charitable deduction and that the QCD cannot be made to a donor-advised fund (DAF) or a private foundation (operating or non-operating).
- Fund charitable gifts with appreciated stock – Many equities appreciated significantly over the last year and it could make it extremely tax-wise to donate those public equities, in kind, to a public charity. In addition to receiving a deduction based on the fair market value of the stock you donate, you could also avoid tax on the unrealized gain on those equities.
- Review your quarterly estimated payments – Review your actual 2021 and anticipated 2022 tax bills to determine your minimum necessary quarterly estimated payments for this year.
- Decide if Indiana will be the state to which you call home for income tax purposes in 2022 – Many taxpayers moved during the pandemic, but were not able to get themselves officially declared residents of a lower-tax state, or to minimize the taxes they owed to multiple states. But you have time in 2022 to establish domicile in the state to which you want to pay taxes this year.Also, it may be easier to switch where trusts that you’ve created are sited, so don’t forget to review those as well.
- Stay up-to-date on potential federal income tax rate increases – It appears increasingly unlikely Congress will pass legislation in 2022 that would raise tax rates on high-income taxpayers. But even if it did pass such a bill, most individuals with incomes less than $10 million a year or non-grantor trusts that accumulate less than $200,000 a year are likely to be unaffected.
- Optimize annual exclusion gifts – Consider making annual exclusion (up to $16,000 per donor, per done) gifts earlier in the year so that any growth on these assets over the course of the year occurs off your balance sheet.
- Harvest capital losses – Consider implementing a systematic program 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 already realized (or future) capital gains.
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. Asset location can be as important as asset allocation to wealth growth and preservation.
All of these actions might not apply to you, but taking the time now can help you best optimize your taxes ahead of next year’s tax season.
Erin Shaw is the Market Manager for the Indianapolis office at J.P. Morgan Private Bank which includes Indiana and Kentucky.
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