Here’s how consultants help clients reduce their 2022 tax bill
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Roth IRA conversion weighting
FROM With the S&P 500 down over 20% in 2022, many investors are considering a Roth Individual Retirement Account conversion that moves pre-tax IRA funds to Roth IRAs for future tax-free growth. The compromise is to pay an advance tax.
However, lower account balances can provide two opportunities: the ability to buy more shares for the same dollar amount, and possible tax savings, depending on how much you transfer. Experts say the tax savings could be exacerbated for investors in lower-earning years.
We regularly discuss Roth conversion for retired clients who have not yet started taking Social Security because their income is temporarily low.
Financial Advisor at AdvicePoint
“We regularly discuss transforming Roth for retired clients who have not yet started using Social Security services because their incomes are temporarily low,” said Matt Stevens, Certified Financial Planner at AdvicePoint in Wilmington, North Carolina. “Job change could also provide a unique opportunity for Roth’s transformation.”
One of his clients lost her job at the end of 2021 and did not open a new one until April, leaving her income much lower than usual in 2022 and her portfolio shrinking. “By completing the Roth transformation this year, she can turn a dire situation into huge tax savings,” he said.
Consider “Tax Collection”
When the stock market falls, investors also consider “collecting tax losses” or selling unprofitable positions to offset profits. But depending on your taxable income, you may also benefit from a lesser known step known as “tax profit collection”.
Here’s how it works: If your taxable income is below $41,675 for single applicants or $83,350 for married couples filing together in 2022, you’ll fall into the 0% capital gains category, which means you can evade paying taxes on the sale of profitable assets.
For some investors, this is a chance to make a profit or diversify their taxable portfolio without triggering an invoice, explained Edward Yastrem, CFP and director of financial planning at Heritage Financial Services in Westwood, Massachusetts.
With a retired client below the income threshold, he said, he was able to reduce their large single-share position, achieving their goals of “providing liquidity and reducing concentrated risk.”
Assess your philanthropic strategy
Instead of being treated as an itemized deduction, QCDs may reduce adjusted gross income and may meet the annual required minimum allocations.
He recently met with a couple who paid over $30,000. demanded minimum payments who separately donated money to their church rather than transferring tax-free funds from their IRA.
“They were demanding thousands more taxable income than necessary,” Ren said.
If you are 70½ or older, you can use QCD to donate up to $100,000 per year. And transfers at the age of 72 and older can be considered the required minimum payments. “Clients over 70.5 really need to pay close attention to their personal circumstances,” Ren added.