Year-end estate & gift planning considerations

Article | December 02, 2022

Authored by Weinlander Fitzhugh

The end of the year is fast approaching, and with it comes the opportunity to reassess your tax and financial circumstances. By taking advantage of savvy estate planning and gifting strategies now, you can minimize your tax liability, maximize your assets, and plan for a secure future. In this article, we’ll outline several moves to consider before the end of the year. 

Recognize losses to offset capital gains

If you have capital gains this year, you may consider recognizing unrealized losses, if any, to help offset those gains. 

Short-term capital gains (for assets held less than a year) are generally taxed at the same rate as your ordinary income, but long-term capital gains are taxed at the lower capital gains rate. In any given tax year, capital losses are applied to capital gains, resulting in a net loss or gain for the year. However, if you have a mixture of short and long-term gains and losses, there is an order in which they are applied. Long-term losses are first applied to long-term gains, and short-term losses are first applied to short-term gains. Excess losses of one type can be applied to gains of another type. If a taxpayer has long-term capital losses in excess of long-term capital gains, applying the excess losses to short-term capital gains is beneficial because the maximum tax rate for long-term capital gains is 20% versus 37% for a short-term capital gain. 

Moreover, if you have capital losses but no gains, you can apply those losses to up to $3,000 of ordinary income. Any losses in excess of $3,000 can be carried forward. This can be especially beneficial if you only saw capital losses this year and want to reduce your adjusted gross income. 

If you plan to itemize, consider bunching charitable contributions.

If you typically make charitable contributions, you may want to go ahead and make next year’s contributions this year. This is referred to as “bunching” and is only effective if you plan to itemize deductions. By making larger-than-usual charitable donations in a single tax year, you can maximize your itemized deductions and potentially benefit from a lower overall tax bill. For 2022, the standard deduction is $25,900 for married filing jointly. That amount raises to $27,700 for 2023, so it might be wise to itemize this year so you can claim the increased standard deduction next year. 

Please note that tax deductions for contributions are limited based on your adjusted gross income (AGI), so make sure that if your strategy is to bunch contributions, you don’t do so in a year in which your AGI limits you.

Contribute appreciated assets 

If you are planning to donate to charity, consider donating appreciated assets. If you donate publicly traded stock that has appreciated, you can deduct the full value of the stock at the time of donation and avoid the capital gain. Avoid donating publicly traded stock that has lost value; instead, sell the stock, take the capital loss and then donate the cash proceeds.

As mentioned with the bunching strategy, be aware of AGI limits on the deductibility of charitable contributions.

Make a Qualified Charitable Distribution

An IRA is a powerful retirement saving tool. But once you reach age 72, you must begin taking required minimum distributions, which are not only taxed as ordinary income but may push you into a higher tax bracket. A qualified charitable distribution is an excellent way to avoid this problem. A qualified charitable distribution is a distribution from an IRA made directly to a qualified charity. The distribution is not included in your taxable income, serves toward your minimum required distribution, and is an excellent way to support the causes you care about. 

Maximize contributions to your retirement plans

Contributing to a retirement plan is a great way to save while reducing taxes. For 2022, the 401(k) contribution limit is $20,500 ($27,000 for age 50 and up). At the very least, consider contributing enough to qualify for employer matching if it is offered. You may also be eligible to make after-tax contributions to your 401(k) plan. After-tax contributions don’t count against the $20,500 limit, but they do count against the overall limit of $61,000.

If you’re eligible, consider funding a Roth IRA. Roth IRAs grow tax-free and are not subject to RMDs, compared to traditional IRAs that grow tax-deferred and are subject to RMDs once you reach age 72. However, you can only contribute $6,000 ($7,000 if 50 or older) annually to Roth and traditional IRAs. You have until April 15, 2023, to make your 2022 traditional IRA and Roth IRA contributions. 

Consider a Roth Conversion

If you currently have a traditional IRA or employer-sponsored retirement plan, you should consider converting to a Roth IRA, especially if your portfolio value has been depressed. A conversion is beneficial if you expect to be in a higher tax bracket in the future. You can contribute now at a lower tax rate and then avoid paying taxes at a higher rate in the future. A conversion is also beneficial if you have losses that can offset the taxable income from the conversion or can afford the taxes on the income realized from the conversion.

When an individual converts a traditional IRA to a Roth IRA, the contributions and earnings in the traditional IRA account will be considered ordinary income and taxed as such. The income realized from the conversion could push you into a higher tax bracket unless you have losses to offset the income from the conversion. However, the stock market has taken a hit in 2022, and as such, your portfolio may have a depressed value which means lower taxable income from a conversion.    

If you have a significant amount in your traditional IRA and you’re worried about being pushed into a higher tax bracket, you might want to consider carrying out multiple Roth IRA conversions over several years. This approach could allow you to convert a large portion of your savings to a Roth while minimizing the annual tax impact. This strategy could prevent you from being pushed into the next higher tax bracket. 

Contribute to your Health Savings Account

If you have a health savings account (HSA), maximize contributions to the account if you haven’t done so already. The funds placed in an HSA do not need to be spent in the calendar year but can be invested and used for future medical expenses. For individuals, the 2022 HSA contribution limit is $3,650, and it’s $7,300 for families. If you’re over 55, you can contribute an additional $1,000 annually. 

Consider making annual gifts.

If you’re planning to transfer wealth to the next generation and have sufficient assets to cover your living expenses, you should consider making annual exclusion gifts before year-end. Individually, you can give up to $16,000 to as many individuals as you choose (or $32,000, with your spouse, if you’re married) each year without using your lifetime gift and estate tax exemption. 

For example, if you’re married with three grown children, you and your spouse could gift each child $32,000, transferring $96,000 of wealth annually without reducing your lifetime exemption. Not only are these transfers tax-free, but they can also potentially save taxes that may otherwise have to be paid by your estate upon death. 

If you have loved ones with significant tuition or medical expenses, you can pay those expenses directly without creating a taxable gift. You can also contribute to a 529 education plan with your annual exclusion gift if you have children or grandchildren who can benefit. 

Revisit your estate plan

As we approach the end of the year, it’s an excellent time to take stock of your estate plan and ensure everything is in order. With interest rate increases and policy changes, it’s wise to review your estate planning documents regularly to ensure they’re still effective. Are the people you’ve named as trusted parties still appropriate to serve in those roles? Do the documents reflect your current wishes? It’s also an excellent time to review your beneficiary designations for your insurance policies, IRA, and 401(k).  Also, if there have been any changes in your family, such as a birth, death, marriage, or divorce, you should make sure your plan reflects those changes. 

As you consider different strategies to reduce your tax liability and better position your estate, it’s important to also consider potential changes in your taxable income, deductions and tax bracket for 2023. For instance, if you expect to be in a higher tax bracket in 2023, it may make sense to bunch deductions in 2023 instead of 2022. While this article briefly touches on several different considerations, it is not a substitute for speaking with one of our expert advisors about your unique situation.  If you would like to discuss strategies to minimize taxes and maximize your estate, please contact our office.