This guide provides an overview of the latest legislative changes that could impact your return and tax preparation tips to help you get the most out of your 2022 tax return.
It’s important to review your income tax withholding and estimated tax payments before filing your return. If you have underestimated your payments, you may be subject to penalties. To minimize or eliminate this penalty for the previous three quarters, consider increasing withholding from wages and bonuses in the fourth quarter.
Annual Gifting Exclusions
The 2022 annual gift exclusion allows you to transfer up to $16,000 per donee without reducing your lifetime gifting exemption. There are several ways to use this yearly opportunity to reduce your taxable estate, such as gifting to future generations or paying education and medical expenses directly on behalf of another individual.
Taxpayers contributing to charities should be extra vigilant in ensuring they comply with the strict substantiation rules accompanying such donations. To protect your tax deductions, confirm that you have proof of payment, itemized receipts for non-cash donations, and a written document acknowledging your contribution from the charity itself.
It’s a win-win strategy when you “give away the gain.” It can benefit your financial future and a public charity at the same time. By donating appreciated assets held longer than one year, you can get a fair market value income tax charitable deduction while also avoiding the income tax on the appreciation. You’ll also bypass the 3.8% surtax on net investment income if applicable.
If you’re over 70 1/2 years old, you may be eligible for a special exemption when making donations – a direct transfer from an IRA to a public charity. The distribution excludes gross income and can offer a significant tax benefit. Ensure all the requirements are met to qualify for the “IRA Charitable Rollover.” However, distributions towards donor-advised funds or supporting organizations cannot take advantage of this exemption.
Retirement and Savings
With the potential for legislation to limit the size of retirement accounts, now is a critical time for individuals to maximize contributions to their retirement accounts. Many account options are available, including a 401(k), traditional IRA, Roth IRA, SEP, and Simple. Those over 50 are afforded an extra advantage, with the ability to make extra “catch up” on contributions up to $6,500 annually.
Converting a traditional IRA to a Roth IRA can be an excellent financial decision. While it will result in taxable income for 2022, assets in the Roth IRA will accumulate tax-free and offer tax-free distributions in the future when income tax rates may be higher. However, converting a traditional IRA to a Roth will increase your Adjusted Gross Income (AGI) and may impact credits associated with AGI or Modified Adjusted Gross Income (MAGI).
The SECURE Act, approved in 2020, changed the mandatory distributions for retirement plans and requires account owners to keep their beneficiary designations up-to-date. Naming a beneficiary is crucial to ensure that your retirement savings are distributed according to your preferences.
Ensuring that wills, trusts, and other documents are updated regularly to consider any changes in your personal or financial situations is of utmost importance.
With the future of the estate, gift, and GSTT exemptions uncertain, now is the time for married couples to take advantage of some much-needed tax relief. By utilizing the current $24.12 million exemption (and rising) available to them, married couples can transfer wealth relatively easily and significantly reduce their estate tax burden. To make the most out of these exemptions, consider having one spouse use their total exemption rather than splitting it between both parties.
We Can Help With Your Tax Planning
At The Law Offices of Lawrence Israeloff, PLLC, we can help you navigate these tricky waters and secure a prosperous financial future for you and your family. Contact us today for tax season assistance.