Now that tax season is over, it is time to start planning for 2022. I know that everyone is probably tax fatigued by now, but we are already well into the second quarter of the year. Therefore, any changes that need to be made to impact your tax liability for this year, need to happen fast. There are also changes that affect Colorado residents to plan for.
First let’s look at tax planning overall. Make sure if you needed to adjust your tax withholding on your paycheck, that you calculate the increase for the remaining pay periods left in 2022. This is also true if you need to increase your 401(k) contribution, the earlier the better.
Next, plan if you will be able to itemize your deductions for this year. Do you have higher mortgage interest, charitable deductions, or medical expenses? If you cannot itemize, think of other ways you can still give to charity and get the deduction while still taking the full standard deduction.
Retirees who are taking their required minimum distributions are eligible to give directly to a charity from their IRA account and be taxed only on the amount you receive. Ask your advisor about setting up a Qualified Charitable Distribution or QCD, before you take this year’s distribution.
You can still deduct up to $300 per tax filer ($600 for joint filers) of charitable donations on the front of the 1040 without itemizing.
High wage earners may benefit from opening a donor-advised fund and bunching several years of charitable contributions into one year, hence being able to itemize. But Colorado residents beware: There is a new law that limits the amount you can itemize on your state income tax return. Even though you may be eligible to receive the full deduction on your federal return, taxpayers who expect to have joint income over $400,000 will be limited to a $60,000 deduction on the Colorado form.¹
This is also a good time to review your potential investment income for this year. With current market volatility, you may consider tax loss harvesting on positions that no longer meet your goals in your portfolio. You can deduct 100% of your realized losses up to the amount of capital gains you incur plus another $3,000 per year against earned income. You can carry forward any unused losses to be used up in subsequent years.
There are other changes in Colorado regarding the College Invest 529 Savings Plan for college education. In the past, taxpayers have been able to deduct the full amount of their 529 contribution against their state income tax liability. Starting in 2022, your deductions will be limited to $20,000 per taxpayer, for each beneficiary for single filers, and $30,000 for joint tax filers.²
Be aware that many of the programs put in place last year were forms of stimulus and have expired. There are no monthly stimulus checks, and this year the Child Tax Credit reverts back to $2,000 per child for 2022. Also, the enhanced Child Care and Dependent Credit and Earned Income Tax Credit have reverted back with the exception of minor inflation adjustments.³
Tax planning all year long may provide you with better options and a lower overall tax bill due next April. If you started a business or became a consultant this year, there are good tax savings strategies for you as well. With only seven months left in the year, early planning can provide optimum tax saving strategies.
1. Colorado House Bill 21-1311; 2. College Invest; 3. IRS.gov
Patricia Kummer has been a Certified Financial Planner professional and a fiduciary for over 35 years and is Managing Director for Mariner Wealth Advisors, an SEC Registered Investment Adviser.