Savvy Year-End Tax Moves for Individual Taxpayers
Good to Know
Time is running out for smart year-end tax moves. Yet, client concerns over economic and political turmoil can interfere with year-end tax planning. For example, how will the market perform given record inflation, the FED’s interest rate hikes, and the threat of recession? What will happen to tax rates and deductions in the new Congress? A well-informed planner or adviser can cut through the confusion and help clients focus on a select few simple-yet-powerful moves to discuss with their CPA. We’ll begin with the “use it or lose it” risks.
Use It or Lose It
We love using pre-tax compensation to pay qualifying expenses from flexible spending arrangements (FSAs). But beware of the risk of forfeiture under the “use it or lose it” rule.
Healthcare FSA
- Carryover limit—your employer may allow no more than $570 of unused 2022 funds to carry over to the 2023 plan year.
- Go shopping1 before year end to avoid forfeitures!
Dependent Care FSA
- Sadly, 100% of unused year-end funds are forfeited.
- Noteworthy—in addition to dependent children under age 13, resident dependent adults such as a spouse or parent may qualify if they are incapable of self-care.
Grace period—an employer may offer a grace period for claiming expenses after year-end.
How to Make a $2,000 IRA Contribution with Only $760
A $2,000 contribution to a traditional deductible IRA or deferral into a 401(k) plan2 can cost as little as $760 out of pocket using the Saver’s Credit. Because of the adjusted gross income phaseouts, this strategy is more likely to work for a client’s young adult child just beginning their career than the parent, but here’s how the math works out, assuming a 12% federal marginal income tax rate.
| Contribution to Traditional Deductible IRA | $2,000 |
| Less 50% Saver’s Tax Credit | -1,000 |
| Less tax savings ($2,000 x 12%) | -240 |
| Net out-of-pocket cost | $760 |
Capital Loss Harvesting
Your client Alicia has capital gains and plans to offset the gains by selling her Exxon Mobil (XOM) stock at a loss before the end of the year. She believes in XOM’s long-term potential and plans to buy the stock back within one week after its sale. Would that work for Alicia’s taxes? No—capital losses are disallowed under the wash sale rule if a substantially identical security is purchased +/- 30 days from the date the shares were sold at a loss. But what if she purchased a XOM call option instead of the stock? Great idea but a call option on the same stock is a substantially identical security—the capital loss would be disallowed.
Coming Tax Attractions and Reflection
We’ll add to our tax discussion in the next blog, How to Choose Between Roth vs. Traditional IRAs. This article now concludes with a reflection; savvy advisors and planners know that a sound understanding of tax management principles can help distinguish their practice. Get that sound understanding through our CFP® Curriculum when you consider CFP® certification. You’ll discover a select few of the reasons our students’ pass rates are much higher than the national averages.
Disclaimer
The information presented herein is provided purely for educational purposes and to raise awareness of these issues; it is not meant to provide and should not be used to provide identity theft protection, investment, income tax, risk management, retirement, estate, or financial planning advice of any kind. An experienced and credentialed expert should be consulted before making decisions relating to the topics covered herein. There are variations, alternatives, and exceptions to this material that could not be covered within the scope of this blog.
1 The website at this link is one of several that provide this service; it is intended only to demonstrate the range of potentially qualifying products available and is not an endorsement or recommendation of any provider. Consult your tax professional to confirm the products are eligible for FSA reimbursement.
2 Deferrals into most employer-sponsored retirement plans also qualify.
