Broker Check

Year-End Tax Strategies

December 08, 2022

There is more certainty regarding tax laws at the end of 2022 than there was at the beginning of the year. In August, President Biden signed into law the Inflation Reduction Act. This legislation focused on climate- and healthcare-related spending and left out virtually all measures that would have directly raised tax rates on individual taxpayers.1

Now that we are nearing the end of the year, we suggest that you review your income tax situation. The following strategies may help you reduce your tax liability as you prepare for the new year.

Tax-Loss Harvesting

Tax-loss harvesting is the timely selling of securities at a loss in order to offset the amount of capital gains tax due on the sale of other securities at a profit. This strategy is often used to limit the amount of taxes due on short-term capital gains, which are generally taxed at a higher rate than long-term capital gains. However, the method may also offset long-term capital gains.

This strategy may consider using the proceeds from the sale to purchase a similar asset which maintains the overall balance of the portfolio. For example, you may sell a municipal bond fund at a loss and purchase a similar bond fund with the proceeds of the sale. However, if you consider this strategy, be careful not to violate the wash sale rule. The wash sale rule states that if you sell a security at a loss and purchase a substantially identical investment within 30 days (either before or after the initial transaction), your tax loss may be denied.

Tax-loss harvesting may be particularly appropriate this year given its volatility. There may be numerous opportunities to sell investments at a loss and repurchase similar investments or, if you wait more than 30 days, to purchase the same investment again.2 Tax-loss harvesting may also help to offset gains from end-of-year distributions from mutual funds. Many mutual funds pass through capital gains to their investors sometime in December. These gains may increase your taxable income substantially, even if your portfolio has taken a hit during the year.

Take Advantage of Itemized Deductions

The higher standard deduction combined with limits on other deductions means fewer people will be able to itemize deductions. An option to get a deduction is to bunch your itemized deductions together into one year and take the standard deduction in an alternate year if eligible. For example, you might be able to accelerate payment of your January mortgage in December or accelerate payment of your state and local taxes that are due early next year. Also, you might be able to cluster charitable contributions into one year instead spreading them out over two years. Or you might be able to accelerate elective medical procedures, dental work or vision care.

Qualified Charitable Distributions (QCDs)

QCDs are a tax strategy that allow individuals who are at least age 70½ and have Traditional and/or Inherited IRAs to distribute up to $100,000 per year directly from their IRA to a charity with no federal income tax consequences. Gifts made to donor-advised funds or charitable gift annuities are excluded from these rules. QCDs may be counted toward satisfying your required minimum distributions (RMDs) for the year, You do not need to itemize deductions to receive this benefit. Currently, QCDs are limited to $100,000 per year. If you file a joint return, the $100,000 limit applies to each spouse.3

Consider A Roth Conversion

Roth conversions allow taxpayers to convert funds in a pre-tax individual retirement account or 401(k) to a post-tax Roth IRA. The amount withdrawn from the IRA is considered income and subject to tax; however, future Roth IRA distributions are tax-free.

Converting to a Roth IRA from a traditional IRA may make sense if you’ve experienced a loss of income (lowering your tax bracket) or your retirement accounts have decreased in value. It may also be considered by retired individuals who are not yet collecting Social Security benefits but may expect higher income from these benefits in the future.

These are only a few of the tax strategies that you may want to consider before the end of the year. If you would like to know more about these strategies and other strategies that may be available, please feel free to contact us. Remember, we are here to help.

Doug Lemons, CFP® *







*Doug Lemons is not licensed to offer securities or advisory services. Doug Lemon supports registered representatives of Lincoln Financial Advisors Corp. Securities and investment advisory services offered through Lincoln Financial Advisors Corp., a broker/dealer (member SIPC) and a registered investment advisor. Family Wealth Decisions Group is a marketing name for registered representatives of Lincoln Financial Advisors Corp. CRN-5321039-120522