As we near the end of another busy year, here is a second round of tax planning strategies that will facilitate this year’s tax filing. Remember to keep in close contact with your tax advisor to identify any significant financial or tax rule changes that may affect you this year. Here is a list of considerations to help you manage your tax bracket, potentially lower your tax liability, and feel prepared for the upcoming tax season.

Harvesting Capital Gains

Taxpayers can sell assets in the current year and pay tax at a lower rate. In effect, this shifts recognition of capital gain from a higher future rate to a current lower rate. This strategy should be considered when taxpayers expect to be in a higher tax bracket in the future.

On the surface, it appears that taxpayers should always harvest gains. However, harvesting gains introduces a tradeoff between lower tax rates versus the loss of tax deferral (tax is paid at a lower rate, but it is paid sooner). Be sure to determine a crossover point at which selling sooner makes more sense.

Harvesting Capital Losses

Selling assets at a loss can help offset capital gains by reducing or eliminating tax on current capital gains. On the surface, loss harvesting produces an economic benefit equal to the tax saved, however, it generally only provides a timing benefit. Assets purchased with the proceeds have a lower basis than assets sold. Therefore, more capital gains tax is owed in the future.

Capital losses are more tax effective if they can be used to offset income taxed at higher rates. Up to $3,000 of capital losses to offset ordinary income. If you plan to sell a stock or security at a loss and buy it back, the wash sale rule prevents taxpayers from repurchasing the same or similar security within 30 days of selling at a loss.

Cryptocurrency & Current Economic Conditions

There are a few things to keep in mind regarding crypto. Cryptocurrency is volatile. Keep a close eye on these assets and watch out for possible cryptocurrency theft losses. Also, there is no wash sale rule for digital assets, so you can buy and sell as you see fit without penalty.

Roth IRA

It may be in a taxpayer’s best interest to convert their retirement IRA to a Roth IRA.

• Taxpayers with favorable tax attributes such as charitable deduction carryforwards, investment tax credits, NOLs, and more can be applied to their conversion income.
• Converted funds can grow significantly!
• The marginal income tax rate is currently lower than it most likely will be at distribution.
• In the event that IRA owner’s spouse outlives them, the Roth IRA can be used to ensure their financial security.

These are just a few additional opportunities to reduce your tax liability in 2022. As always, your Dermody, Burke & Brown tax professional is here to help with any of your tax planning questions.

The information reflected in this article was current at the time of publication.  This information will not be modified or updated for any subsequent tax law changes, if any.