By Brian Carter, CPA
The end of the year is nearby, leaving taxpayers only a short window to take financial steps that could alter their 2022 tax situation. By now, you probably have a good idea of where you stand in terms of income and potential tax liability for the year. Even so, it is a good idea to take a look at the big picture while there is still time for action.
The winter holiday season is prime time for giving, whether it is to family members, local charities or favorite causes. The gift tax exclusion is $16,000 in 2022. The limit applies separately to each recipient, meaning taxpayers may give tax-free gifts of up to $16,000 to an unlimited number of lucky giftees. Married couples who file jointly (MFJ) can each make gifts to the same recipient up to the limit before gift tax reporting requirements kick in.
Gifts made to qualified nonprofit organizations are never subject to gift tax, but they are tax deductible for those who itemize deductions. Since the Tax Cuts and Jobs Act of 2017 raised the standard deduction, many charitably inclined taxpayers have opted to compress their philanthropic donations into a single year. In some cases, making one large donation every two or three years can allow your gift to reduce your tax liability, whereas annual gifts under the standard deduction ($25,900 for MFJ in 2022) offer no tax benefit to donors.
Taxpayers who do not need the income from the required minimum distribution (RMD) on their IRA can consider making a qualified charitable donation (QCD). If you are over the age of 70 ½, you can donate up to $100,000 of the RMD from a traditional IRA, directly to an eligible charity. Your QCD is not counted as taxable income, which means it cannot trigger phaseouts of certain tax benefits nor will it bump you into the next income bracket. Other rules apply, so be sure to consult your tax advisor.
Is your 2022 income lower than usual? That is true for many people, but it is not all bad news. In fact, a down market plus a lower tax bracket add up to a great opportunity to convert your traditional IRA into a Roth account. Even if your income hasn’t taken a hit this year, you may want to consider a Roth conversion for the many benefits these accounts provide.
Money grows tax-free in a Roth account and you can generally make withdrawals free of taxes and penalties after age 59 ½. Contributions can be withdrawn at any time, tax- and penalty-free, but you’ll owe taxes on earnings if you take them out early.
However, you don’t have to take them out at all because Roth IRAs are not subject to RMDs. What’s more, you can contribute at any age as long as you have earned income. For 2022, contributions are capped at $6,000 of earned income ($7,000 for those over age 50).
Money that is left in the account passes to your heirs tax-free, too. Depending on the circumstances, heirs could still grow the account tax-free for years—maybe decades. And because that money is in a Roth IRA, any distributions will ultimately be tax-free to recipients. The inherited IRAs rules can be tricky, so make sure you consult your advisor.
Potential tax changes
The Biden administration has proposed several changes to the tax code that could significantly alter the tax landscape, if enacted. Proposed changes include:
- Increasing the corporate flat tax rate from 21% to 28%
- Increasing the top marginal income tax rate for individuals from 37% to 39.6%, prior to its planned return to the higher rate in 2026
- Applying ordinary tax rates to long-term capital gains and qualified dividends for MFJ taxpayers with an adjusted gross income of $1 million or higher
- Treating appreciated property gifts and death transfers as a sale
- Placing limitations on like-kind exchanges, with gains in excess of $500,000, per single taxpayer, treated as taxable income
While it is unlikely all these proposals will become law, you should be aware that they are on the table and keep an eye on their progress. Waiting to see what happens in Washington could meaningfully shift the tax implications of certain transactions. Given the possibilities, you may decide it makes sense to complete investments, wealth transfers or other financial actions planned ahead of schedule. Talk with your advisor or reach out to Mauldin & Jenkins for knowledgeable guidance.
Brian Carter, CPA, is a partner with Mauldin & Jenkins, LLC. Brian received his BBA in Accounting from Mercer University in 1996 and is licensed as a CPA in Georgia and Florida. Since joining Mauldin & Jenkins, Brian has specialized in providing a variety of accounting, auditing and tax services to not-for-profit organizations, affordable housing developers, restaurants, construction contractors and manufacturing and distribution entities. Brian also consults with not-for-profit board of directors on governance and policy issues and is a frequent speaker to various trade and civic organizations on topics affecting the not-for-profit industry. Brian is a member of the American Institute of Certified Public Accountants, the Florida Society of Certified Public Accountants and a member of the Leadership Florida Cornerstone Class 38.