As far as individual income tax rates are concerned, 2022 is likely to go virtually unnoticed unless a lame-duck Congress passes some hasty legislation. However, several crucial federal tax decisions are still to be made before the end of the year that may lead to cost savings, especially for investors.
Tax planning is crucial now because Americans are already experiencing the most extraordinary inflation in years and might not even receive a significant tax refund in 2023. Repayments could be reduced the following year, the IRS said recently.
In light of this, here are some recommendations for optimizing your return and making an early start on financial savings.
Uncle Sam offered some relief in 2022 when bond and stock prices significantly declined. Capital losses may offset taxable gains, and net losses can lower income by up to $3,000 per year. Even though losses beyond that sum can be used in subsequent years, the $3,000 amount has stayed the same for many years. It’s a small consolation prize for those who lost money on their investments this year.
It’s important to note that long-term losses are applied first to long-term gains, and short-term losses are applied first to short-term profits. If an investment is allowed to grow for more than a year, it is regarded as long-term. This tax benefit also covers gains and losses held in taxable accounts. It does not cover losses in 401(k) plans at work, individual retirement accounts, and other tax-sheltered assets.
Years ago, when Congress raised the standard deduction, they made it more difficult for people to itemize their deductions. Property taxes, mortgage interest, and charitable contributions are the most frequently claimed itemized deductions. However, you’ll need more than $12,950 in qualifying costs for a single taxpayer or $25,900 for a married couple to claim this deduction. If not, the standard deduction should be used instead.
The deductions that most individuals have the most control over are usually charitable contributions; you may choose which nonprofit organizations to donate to and how much money to give each year. By accepting the standard deduction in 2021, people could deduct charitable contributions up to $300 for singles and $600 for married couples, but that option is no longer available.
There is another charitable tax advantage to consider if you are at least 75; you can donate a portion of your IRA to charity and receive a tax benefit. One option is to give some of your IRA money to a good cause. Such a transfer is known as a QCD or qualified charitable distribution.
In this case, you can’t claim a tax deduction for your donation because the money came straight out of your IRA and wasn’t included in your AGI, but you can still make a charitable contribution. Doing so can help you save money on Medicare costs, protect more of your Social Security income from taxes, and provide you with other benefits. The donation may also be used for any required minimum distributions, or RMDs, you are obligated to make.