Please ensure Javascript is enabled for purposes of website accessibility

Private banking: Top 2022 year-end planning ideas for individuals

Tina Myers, Key Bank

This year, we have seen our economy learn not only to live with the COVID-19 pandemic but to reaccelerate, too. We have also experienced geopolitical risk with the war between Ukraine and Russia, investment market volatility, rising inflation and rising interest rates. We have seen much of President Joe Biden’s Build Back Better legislation dwindle to what was passed in the Inflation Reduction Act.

With this year’s midterm elections, the president’s tax agenda may be stopped in its tracks. A few other legislative proposals possibly could pass during a lame-duck session, namely retirement saving incentives and provisions that could affect charitable planning. But a few provisions in the Inflation Reduction Act will affect planning in future years as will the expiration of tax cuts at the end of 2025.

Market volatility and inflation seem to be top of mind for many clients. So, as we approach year-end, do not get caught up in the uncertainty. Make sure your planning is where it should be with these planning ideas to consider as we wrap up 2022.

Tax bracket management – Accelerate income, accelerate or defer deductions

For now, tax rates may stay the same until the end of 2025. If you expect to be in a higher tax bracket in the next few years, you could accelerate income so it is taxed at the lower rate, deferring deductible expenses until later years when they can be claimed to offset higher-taxed income. Roth conversions, harvesting gains and deferring loss harvesting, exercising stock options, accelerating bonuses or moving up the closing date of a sale are just a few strategies to consider.

Many more taxpayers use the standard deduction. To maximize itemized deductions in certain years, consider the tactic of bunching expenses into this year or next year to get around deduction restrictions imposed by the Tax Cuts and Jobs Act (TCJA). This applies to deductions such as charitable, state and local taxes (up to $10,000), mortgage interest and miscellaneous itemized deductions. If your tax rate is expected to be higher in the future, consider deferring itemized deductions.

Vincent Lecce, Key Bank

Gain/loss harvesting – Make the most of reduced capital gain tax rates

Capital gain planning is still important. Long-term capital gains are taxed at a rate of 0%, 15% or 20%. And the 3.8% surtax on net investment income may apply. If these preferential rates are eliminated after 2025, long-term capital gains could be subject to a higher rate, so you may consider capital gain harvesting – selling now and repurchasing with a higher basis so that future sales will have less capital gain taxed at higher rates. Capital losses cannot be carried back by individuals but can be carried forward indefinitely.

Taxpayers wanting to realize paper losses on stocks while retaining the same investment position can sell and buy shares in the same company or another company, just avoid the wash-sale rules which disallow the loss if substantially the same shares are acquired within the 61-day period beginning 30 days before and ending 30 days after the sale.

The future change in preferential rates also applies to qualified dividend income. This could affect your investment strategy of shifting investments out of holdings that generate income taxed at ordinary rates (e.g., bonds) and into dividend-paying stocks to achieve tax savings. Dividend paying stock may not be as advantageous. You may consider tax-exempt bonds for additional tax savings. If this future change is more likely to occur as a result of expiration of TCJA provisions, review your investment allocation and adjust accordingly.

Roth conversions

With the potential for future higher tax rates, many more individuals are considering a Roth conversion and paying the tax on the conversion now at the lower rates. As you get closer to year’s end, you can determine your 2022 marginal tax bracket and projected investment income with more certainty.

If you are trying to convert your traditional IRA to a Roth IRA to pay the conversion tax at a lower rate, start those conversations now. Roth conversions can also offset unused tax carryovers that may be wasted.

Traditional IRA to Roth IRA conversions can reduce future required minimum distributions (RMDs) and create a potential tax-free inheritance for children. Under present law, there are no required distributions by the participant from the Roth IRA in future years. There are, however, RMDs for the non-eligible designated beneficiaries of a Roth IRA, generally within 10 years of the original owner’s death. And according to the IRS, under the recently proposed SECURE Act regulations, Roth IRA owners are considered to have died before their required beginning date.

This means that there are no annual RMDs from inherited Roth IRAs for beneficiaries subject to the 10-year rule. An inherited Roth IRA offers complete flexibility within the 10-year period and avoids the complicated RMD rules. But you could still get 10 years of post-mortem tax-free growth before final distribution to the non-eligible designated beneficiary.

If your beneficiaries will have lower tax rates than you, then conversion may not be the right strategy. Higher earning taxpayers who cannot contribute directly to a Roth IRA may be able to contribute to a non-deductible IRA that might later be converted to a Roth IRA. Alternatively, for those unable to contribute to Roth IRA, you may be able to convert the after-tax amount to a Roth IRA or do an in-plan Roth conversion to a Roth 401(k) account. But you can no longer recharacterize Roth conversion contributions as a result of the TCJA.

Review your portfolio

Make sure your asset allocation is in line with your targets and that it matches your risk tolerance and return requirements. Having a financial plan helps determine what the required return is in order to meet your goals. Staying disciplined during times of volatility is key for the remainder of 2022. With the bond market this year providing little income, there is still some merit to holding bonds for stability and capital preservation. For some investors, new tools such as alternatives and real assets can be incorporated to hedge against inflation.

Review RMDs in light of the SECURE Act

The SECURE Act of 2019 basically eliminated the “stretch IRA,” which allowed IRA or defined contribution plan beneficiaries to draw down the remaining plan benefits over the beneficiary’s life expectancy. Inherited IRAs and inherited defined contribution plans must now be distributed within 10 years of the original owner’s death. And according to the recently proposed SECURE Act regulations, if an IRA owner died on or after their required beginning date, the account is also subject to annual RMDs for years one to nine of the 10-year period. There are ways to simulate a stretch IRA using lifetime income strategies such as naming a Charitable Remainder Trust (CRT) or a Charitable Gift Annuity (CGA) as beneficiary or using the RMD to purchase life insurance that will provide a tax-free benefit to heirs.

Markets will always be unpredictable, and the volatility experienced in 2022 has been no exception. Are you prepared for what is ahead? As year-end approaches, review your financial situation with your advisor now and make adjustments before time runs out.

Vince Lecce, CIMA® is Senior Vice President and Rochester Market Leader for Key Private Bank. He can be reached at (585) 238-4107 or [email protected]. Tina A. Myers, CFP,® CPA/PFS, MTax, AEP,® is Director of Financial Planning for Key Private Bank. She can be reached at [email protected].

Any opinions, projections or recommendations contained herein are subject to change without notice and are not intended as individual investment advice. This material is presented for informational purposes only and should not be construed as individual tax or financial advice. KeyBank does not provide legal advice. KeyBank is Member FDIC. KeyCorp. © 2022.         CFMA #221117-1814031