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Individual tax planning strategies

Fall is officially here, and tax season is right around the corner. Now is a good time to start thinking about what your tax bill may look like in April and possible ways to lower it while you have time this calendar year.

Strategies to lower your tax bill

Itemized vs standard deduction

You should determine whether you will be able to take the standard deduction or if you will have enough deductions to itemize. For 2022, many taxpayers won’t itemize because of the higher standard deduction available. For joint filers, the standard deduction is $25,900, $12,950 for single and married couples filing separately, and $19,400 for heads of household. Many of the itemized deductions previously available have been reduced or ended under current law, making itemizing less advantageous for many.

Some of the more common itemized deductions to take advantage of include the following:

  • Medical expenses – expenses must exceed 7.5% of your adjusted gross income to be deductible.
  • State and local taxes – these include income taxes, property taxes, and personal property taxes. However, these deductions cannot exceed $10,000 in aggregate.
  • Charitable contributions – consider cash and non-cash items.
  • Mortgage interest – may be limited based on the amount of overall mortgage debt.

Double Up Strategy

Many taxpayers may be able to work around these deduction restrictions by applying a “double up” or “bunching” strategy to pull or push discretionary medical expenses and charitable contributions into the same tax year. For example, if you’ll be able to itemize deductions in tax year 2022 but not next, you may want to make two years’ worth of charitable contributions before year end.  Donor Advised funds are one way to front load your charitable giving in one year to really take advantage of the benefits of itemizing.

Keep in mind that these deductions will only save you in taxes if in total they are more than the standard deduction available for your filing status mentioned above.

Other strategies

  • Postpone income until 2023 and accelerate deductions into 2022 if you are able to claim certain tax breaks that are phased out at different AGI levels or if you expect to be in a lower tax bracket next year. These tax breaks could include deductible IRA contributions, child tax credits, education credits, and student loan interest deductions.
  • Consider converting a traditional IRA into a Roth IRA. If your IRA has lost value, this may be beneficial. However, this conversion will increase your income and AGI in 2022, possibly reducing tax breaks mentioned above.
  • High-income individuals should plan for the 3.8% net investment tax on certain unearned income.
  • Arrange to defer a large bonus to the beginning of next year, rather than include in the current year if your tax rate is lower next year
  • If you are 70½ or older by the end of 2022, consider making 2022 charitable donations via qualified charitable distributions from a traditional IRA. These distributions are not included in your gross income or deductible on your return.
  • If income-earning property is given to relatives in lower income tax brackets who aren’t subject to kiddie tax, consider making gifts sheltered by the annual gift tax exclusion before the end of the year. For 2022, this amount is $16,000 per recipient.

Take the time to plan ahead now, so there are no surprises in April. Please contact your Wegner CPA’s tax advisor to discuss tax planning strategies that best fit your situation.

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