Tax Planning - Rainbow in the Clouds?

XPYRIA Team Insights

Tax Planning - Rainbow in the Clouds?

Karen Fadzen, CFP®, CDFA™, CAS® XPYRIA Team Insights

Opportunity is Knocking    

Recent market volatility provides multiple opportunities for planning that may yield substantial benefits in the long-run. Rather than throw your hands up in the air, schedule an appointment with your financial advisor to review your investment portfolio, tax and estate planning to determine if there are any actions that should be taken prior to year-end. And please note that all tax planning decisions should be made by December 1st to ensure that the necessary Schwab or other custodial paperwork is completed and processed by the end of the calendar year.  

Do you have access to professional tax & estate planning guidance? 

As your financial advisor, we can identify potential opportunities for tax planning and multi-generational estate planning, but this should not be relied upon in lieu of consultation with appropriate tax and legal advisors. We provide guidance and coordination with those professionals to develop a course of action based on your long-term objectives. If you self-prepare or use a “drive by” tax preparation service, it is difficult to execute cohesive multi-year tax planning. Additionally, we find that the quality of this type of tax preparation is lacking in that costly mistakes are often made, or opportunities overlooked. Most effective tax planning begins with a current year tax estimate which can be adjusted to determine the potential tax impact of alternative tax planning strategies.

The Tax Cuts and Jobs Act of 2017 provides favorable tax rates and income brackets through the end of 2025. That is 4 years from 2022 – 2025 for multi-tax year planning depending on your individual situation.  

1.    Tax Loss Harvesting

Do you have a concentrated stock position with a low basis or substantial unrealized gains in your existing taxable portfolio? Now could be an opportune time to realize losses to offset unrealized gains and transition to a better diversified portfolio. If you are in the 0 – 15% capital gains tax bracket, this can be compelling.

2.    Roth IRA Conversion

If you anticipate your current year tax rate is equal to or below your tax bracket in retirement, then a market decline such as the current environment may create an excellent time to consider a Roth conversion. For a Roth conversion, you would pay ordinary income tax at your current tax rate on the amount of the assets moved from your traditional IRA to your Roth IRA. There will be no future tax on the funds withdrawn from the Roth IRA, if the withdrawal of assets is at age 59 ½ or older and 5 years or more have passed since the conversion date. Additionally, Roth IRAs have the benefit of no Required Minimum Distributions. 

3.    Family Gifting

Does it make sense to take advantage of the $16,000 annual gift tax exclusion (without counting against the lifetime exemption) to make gifts to family or any other person. Keep in mind that your assets may be subject to Inheritance Tax for bequeaths to direct lineal descendants (4.5% in PA) and that you may save Inheritance taxes ($720 in PA) if you make the gifts now and live at least a year from the date of the gift. We can assist with determining what makes sense with your estate planning attorney.

4.    Charitable Giving

§ Qualified Charitable Deduction (QCD): Does it make sense to make a QCD from your IRA this year to reduce your taxable Required Minimum Distribution (RMD) and remove the funds from your IRA for calculation of the RMD in future years?

§ Gifts to Donor Advised Funds (DAF):  You can give to a donor advised fund to take a charitable deduction in 2022 if you know you want to make charitable contributions but are not sure which non-profit organizations to benefit yet. The charitable deduction would only be applicable as part of your itemized deductions if the total of those and your medical, tax and other itemized deductions total more than your standard deduction.

5.    Medicare Income-Related Monthly Adjustment Amount (IRMAA)

Review IRMAA Medicare premium brackets. For 2022, they are $91,000 for single filers and $182,000 for married filing jointly for the first level of premium of $170.10/month for Part B*. Determine if it is possible and/or makes sense to defer income into 2023 to avoid this premium, such as delaying an IRA distribution that is not required, not recognizing capital gains, realizing losses in your portfolio, etc.

6.    Income Tax Withholding & Estimated Income Tax Payments

Review to determine if your withholding and/or estimated income tax payments are appropriate for your goals relative to overpaying or owing taxes at tax time. 

*Note that if both spouses are on Medicare, each spouse will pay a separate IRMAA premium.

About the Author

Karen Fadzen, CFP®, CDFA™, CAS®

Senior Client Advisor
Ms. Fadzen has knowledge and experience in comprehensive financial planning that integrates global investment management, legal, tax, insurance, and family dynamics. She enjoys helping clients organize their financial lives so that they understand their financial situations and the financial decisions that need to be made. This has led to specialization in divorce financial planning and helping women and families in transition. Ms. Fadzen's role as a divorce financial planner helps couples identify and quantify key financial elements that need to be settled.  Facilitating communication and financial transparency between spouses ultimately saves money and drama and enables them to move forward with their lives.  She is trained in the Collaborative Divorce Process and is a member of the Collaborative Law Association of SW PA.  Ms. Fadzen is dedicated to improving financial literacy through informational presentations to clients, their families, and related organizations upon request.