Recent years have not seen the sweeping tax code revisions of years past, but the tax landscape is nevertheless constantly evolving — whether through annual contribution limit updates; sustained adaptation to the last major reform, in 2017; or, most recently, a host of new, currently unrealized, state-level proposals for taxes on wealth.
As always, we believe it is far better to plan than predict. Below, in consideration of several of the more significant recent developments impacting taxpayers, as well as tried-and-true best practices, we highlight six strategies for optimizing your taxes for filing year 2022 and beyond.
We emphasize that although taxes are an important component of your wealth plan, they should be treated in consideration of your unique circumstances and goals. Please reach out to your advisors to discuss which strategies may be appropriate for your situation and overall wealth plan.
Maximize IRA Contributions for the 2022 Tax Year
(deadline, April 18, 2023*)
Contributions to a traditional IRA are generally tax deductible, which makes maximizing contributions an effective strategy for long-term wealth planning. (Conversely, while contributions to a Roth IRA are not tax deductible and subject to certain income limits, future distributions are generally tax-free.)
For tax year 2022, individuals can consider fully funding IRAs up to $6,000, and those 50 and older may fund up to $7,000. Business owners, meanwhile, may consider fully funding SEP (Simplified Employee Pension) or SIMPLE (Savings Incentive Match Plan for Employee) IRAs for employees. The SEP IRA contribution limit for 2022 is the lesser of 25% of the employee’s compensation or $61,000, while the contribution limit for SIMPLE IRAs is $14,000 or, for those 50 or older, $17,000.
* Business owners who offer SEP or SIMPLE IRAs generally have until the company’s tax filing deadline, including extensions, to make contributions for that specific tax year.
Maximize HSA Contributions for the 2022 Tax Year
(deadline, April 18, 2023)
Contributions to a health savings account (HSA) are generally tax deductible. The dual benefit of potential investment growth in an HSA and using distributions for qualified medical expenses, free of income taxes, can make this an attractive wealth planning strategy for many.
For 2022, those enrolled in a high deductible health plan can fully fund HSAs up to $3,650 for individuals and $7,300 for families. Those older than 55 are permitted an additional $1,000 in catch-up contributions.
Consider Recent Changes to the Deductibility of State and Local Taxes
Lawmakers in certain states have adopted strategies to preserve the deductibility of state and local taxes, in excess of the $10,000 cap. Many of these strategies allow owners of pass-through entities to deduct state taxes from their business income by having the business elect to pay the taxes at the entity level. In essence, this generally means a smaller amount of taxable income will pass through to the owner’s personal return. The IRS issued a notice in 2020 allowing such changes1, and more than 25 states have enacted legislative measures to offset state and local taxes to date.
Invest in a Qualified Opportunity Zone Fund to Mitigate and/or Defer Realized Gains
(the deadline is generally 180 days from the date of your realization event)
An outcome of the 2017 Tax Cuts and Jobs Act, Opportunity Zones offer taxpayers the double benefit of preferential tax treatment while investing in economically distressed communities as designated by the Department of Treasury. Consider investing eligible gains in a Qualified Opportunity Fund (QOF) within the 180-day window in order to defer taxes associated with realized gains.
Explore Options for Paying Your Tax Bill
(deadline, April 18, 2023)
While tax returns can generally be extended, tax payments must be made on or before the April filing deadline. As such, raising cash to make tax payments is often top of mind. If so, consider the use of paying your bill with leverage, versus liquidation, in order to potentially reduce the risk of capital gains tax.
Remain Aware of Proposed State Taxes on Wealth
Finally, targeting wealth as a source of tax revenue is gaining traction politically at the state level. Last year, Massachusetts voters approved a constitutional amendment that added a new 4% surtax on annual income over $1 million, in addition to the 5% state income tax. Additionally, to date, there are proposals to enact variations of new taxes on wealth in at least seven states. While these proposed changes may or may not materialize, we recommend proactively planning with your advisors to ensure your plan is built to weather all seas. For a detailed discussion of the proposals and planning strategies for consideration, see “State Tax Spotlight: Planning for Potential Wealth Taxes.”