The Year-End Planning Tip That Has Finance Profs Talking

What You Need to Know

I asked my colleagues at The American College for year-end planning ideas, and they delivered.
Tax loss harvesting was a topic on everyone’s list.
Another tip: Clients who turned 72 in 2022 should consider taking RMDs by year end, even if they can wait until April.

What’s special about year-end planning in 2022?

Harvesting equity losses isn’t novel, but this year advisors get to pick from a range of assets that fell at the same time as stocks — most notably long-term bonds. Clients who dabbled in digital assets finally get to experience the joy of harvesting losses (or paying taxes on gains if they got out early).

Structural changes include changes in required minimum distribution tables and increases in qualified plan contributions, as well as the imminent passage of the Secure 2.0 Act.

Gain From Losses

To help put together a comprehensive list, I asked the faculty at The American College of Financial Services for their own ideas. On everyone’s list was tax loss harvesting, particularly for bonds that experienced historic losses in 2022.

For example, Vanguard’s long-term corporate bond ETF is currently sitting 22% below its price of Jan. 1, 2022. Harvesting is a no-brainer to lock in losses since there are plenty of other similar bond ETFs that can be substituted without worrying about wash sale rules.

While you’re at it, if your Dogecoin is down 80% and you’re considering holding, remember that you can use crypto losses to either offset gains or you can reduce your taxable income by up to $3,000 per year by selling.

Research shows that individuals often hold on to their losing investments too long hoping they’ll eventually recover, and advisors should help clients view loss-harvesting as an opportunity to reduce taxes rather than an acceptance of failure. Taking losses is even more valuable for investors who would otherwise pay short-term capital gains captured earlier in 2022.

Bunch Charitable Donations

Charitably inclined clients who earned enough to get bumped into a higher tax bracket, and in particular the big jump from the 24% to the 32% marginal rate, can take advantage of bunching donations by the end of 2022 in donor-advised funds.

Retirement Income Certified Professional (RICP) co-director Steve Parrish notes that by combining anticipated future donations in 2022, a client can exceed the significantly higher standard deduction in place since 2017.

The roughly 7.1% increase in tax brackets in 2023 means that 2022 is the year to take advantage of bunching opportunities since clients are more likely to benefit from deductions — especially for those who expect their incomes in 2023 to be about the same or lower.

If you’re going to itemize, RICP adjunct professor Art Prunier reminds advisors to recommend that clients pay estimated state taxes and property taxes by the end of the year to maximize potential 2022 deductions. If possible, also consider bunching health care expenses by the end of the year to optimize itemization.

More Tax-Friendly Ways to Give

While you’re making contributions to a donor-advised fund, consider the opportunity to add adult children as advisors for the donations. “Since DAFs allow for joint or supervised charitable giving, you can pass along your values and share with your children the principles of charitable giving,” notes Parrish. “As successor advisors they can even continue making charitable gifts in your name after your death.”

Clients over 72 who will take the standard deduction can still get a tax break through a qualified charitable distribution from their IRA. Instead of taking a required minimum distribution and making a charitable donation that offers no tax benefit without itemization, Parrish calls the QCD a no-brainer.

A QCD provides “a way to avoid the taxation of an IRA, and a way to escape other retiree taxes such as Medicare’s IRMAA premium,” he says. “Rather than being forced to take an IRA payment into your adjusted gross income, you can have the IRA custodian send funds directly to your charity. The transferred donation counts as part of your RMD payment and never becomes part of your 1040 income.”

401(k)s and RMDs

While clients have until their tax filing deadline to contribute to an IRA, this isn’t the case with contributions to an employer-qualified savings plan. Assistant Professor Kevin Lynch notes that “While IRAs can be funded as late as the tax filing deadline, qualified plans have a Dec. 31, 2022, deadline.” Don’t forget the $6,000 in available catch-up contributions for clients who turned 50 in 2022.

Of course, clients who turned 72 in 2022 should consider taking RMDs by the end of 2022 even if they can wait until April to avoid taking two distributions in 2023. And don’t forget to use the updated RMD tables!