Here are seven great tips for tax planning as 2022 wraps up
Edward A. Zurndorfer
There is less than two months remaining in 2022. Now is the time for federal employees to make some year-end tax moves in order to reduce their 2022 federal and state income liabilities. The following are some suggested tax moves that employees can perform during the next month or so that may reduce the amount of taxes they owe when they submit their 2022 federal and state income tax returns in spring 2023.
1. Use any capital losses to offset capital gains and other (ordinary) income.
The year 2022 has not been a good year for the stock market. For many individuals who invest in the stock market (investing in individual stocks and “open-end” funds) the value of their investment portfolio has decreased to the extent that the value is less than what these investors paid for their investments. If these investors were to sell these investments (held in non-retirement brokerage accounts) and receive in sale proceeds less than what they paid, they would incur what is called a capital loss. Capital losses can be applied dollar-for-dollar against capital gains during the year in which capital gains have incurred. By using capital losses to offset capital gains, an individual can avoid paying federal and state income taxes on the capital gains. If any excess capital losses incurred during 2022 remain after applying against capital gains, then up to $3,000 of excess capital losses may be applied against other income received during 2022. Other income includes salary income, interest and dividend income and rental income. Additional tax savings during 2022 may then be possible as a result of using these excess capital losses. Any capital losses remaining after the $3,000 can be carried into 2023 and used to offset any capital gains incurred during 2023.
Individuals who are considering selling any portion of their non-retirement stock investment portfolio at a loss are advised to first talk to their financial advisor in order to make sure that selling their stock-oriented portfolios does not severely impact their short-term and long-term financial goals. To recognize any capital losses for tax year 2022, any sale of capital assets must be performed before January 1, 2023. Also, individuals are advised to be aware of the “wash-sale” rule. The “wash-sale” rule prohibits selling an investment for a loss and replacing it with the same or a “substantially identical” investment 30 days before or after the sale. If an individual violates the “wash-sale” rule, the IRS will disallow the individual from using the capital loss resulting from the sale of the investment.
2. Filing status.
A tax return filed as married filing separately is for most married couples not beneficial for tax purposes. However, in some situations such as when one spouse earns substantially less than the other spouse or when one spouse may be subject to IRS penalties for issues related to tax reporting, it may be advantageous to use married filing separately tax status. If one spouse was not a full-year U.S. resident during 2022, then an election is available to file a married filing joint tax return where such joint filing status would otherwise not be available.
3. Deciding which year is the better year (2022 or 2023) to make charitable contributions.
Many individuals do not start thinking about making their annual charitable contributions until late November or early December. But now in early November is a good time to start thinking about how much to make in charitable contributions and which is a better year – 2022 or 2023- to make these contributions for tax purposes. In particular, whether to “bunch” charitable contributions into 2022 (and itemizing rather than taking the standard deduction) or to delay making these contributions into 2023 and itemizing on their 2023 federal income tax return. The following example illustrates:
Example 1. Jerry and Alice are married filing jointly and they plan to take the standard deduction when they file their 2022 income tax return. They were renting for most of 2022 and they just settled on a house they purchased in late October 2022. They will therefore have a limited amount of mortgage interest to include as an itemized deduction on their 2022 federal income tax return. Jerry and Alice are better off using the standard deduction on their 2022 federal income tax return rather than itemizing. For 2023, they will have a sufficient amount of mortgage interest to the extent they will be better off itemizing rather than using the standard deduction. They should therefore postpone making their charitable contributions into 2023 in order to include those contributions as itemized deductions on their 2023 federal income tax return.
4. Mortgage interest deduction.
For individuals who sold their principal residence during 2022 and acquired a new principal residence, their mortgage interest deduction may be limited. For mortgages of more than $750,000 obtained after December 14, 2017, the mortgage interest deduction is limited to the portion of the interest allocable of up to $750,000, or $375,000 in the case of married individuals filing separately. For a mortgage on a principal residence acquired before December 15, 2017, the limitation applies to mortgages of up to $1,000,000 or $500,000 in the case of married individuals filing separately, or less. The following two examples illustrate:
Example 2. Frank and Julia, a married couple who file their federal income tax return as married filing jointly, purchased a principal residence in May 2017. The purchase price was $850,000 and they made a $50,000 down payment and applied for and were approved for a $800,000 mortgage. Because the amount of the mortgage is less than $1,000,000, the mortgage interest that Frank and Julie pay is fully deductible as an itemized deduction on their federal income tax return.
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Example 3. Charles and Hannah, a married couple who file their federal income tax return as married filing jointly, purchased a principal residence in May 2021. The purchase price was $1,100,000 and Charles and Hannah made a $100,000 down payment. They applied for and were approved for a 3.5 % $1,000,000 30-year mortgage. During 2021, Charles and Hannah paid a total of $30,000 of mortgage interest. Because they purchased their principal residence after December 14, 2017, the amount of the mortgage interest that is deductible is limited to the first $750,000 of the mortgage principle. Charles and Hannah therefore figure that the mortgage interest that is deductible during 2021 as follows:
$30,000 times $750,000/$1,000,000 equals $22,500
5. Deductions for interest on home equity debt.
Interest on home equity debt may be deductible if the individual who took out the home equity loan uses the loan proceeds to buy, build, or substantially improve his or her home. For example, interest on a home equity loan used to finance the building of an addition to a home. An example in which the interest paid on a home equity loan is not deductible is when the home equity loan proceeds are used to pay off credit card debt. It is therefore necessary to document the portion of the debt for which an interest deduction may be taken.
6. Gain or loss on the sale of a principal residence.
If an individual sold his or her principal residence during 2022, up to $250,000 ($500,000 for married filing jointly) of the gain on the sale is excludible from income tax. Any gain in excess of the $250,000/$500,000 gain exclusion is taxable – even if the home seller uses the net sale proceeds to purchase a more expensive principal residence. In general, a loss on the sale of a home is not deductible for income tax purposes.
7. No deduction for mortgage insurance premiums as qualified residence interest.
Under Internal Revenue Code Section 163(h)(3)(E), individuals can treat mortgage insurance premiums paid before 2022 for qualified mortgage insurance as qualified residence interest and potentially deductible. But this provision expired at the end of 2021 and is not available for 2022.
Edward A. Zurndorfer is a CERTIFIED FINANCIAL PLANNER™ professional, Chartered Life Underwriter, Chartered Financial Consultant, Chartered Federal Employee Benefits Consultant, Certified Employees Benefits Specialist and IRS Enrolled Agent in Silver Spring, MD. Tax planning, Federal employee benefits, retirement and insurance consulting services offered through EZ Accounting and Financial Services, and EZ Federal Benefits Seminars, located at 833 Bromley Street – Suite A, Silver Spring, MD 20902-3019 and telephone number 301-681-1652. Raymond James is not affiliated with and does not endorse the opinions or services of Edward A. Zurndorfer or EZ Accounting and Financial Services. The information has been obtained from sources considered to be reliable, but we do not guarantee that the foregoing material is accurate or complete. While we are familiar with the tax provisions of the issues presented herein, as Financial Advisors of RJFS, we are not qualified to render advice on tax or legal matters. You should discuss tax or legal matters with the appropriate professional.
