By MARK P. CUSSEN
Nov. 28, 2022
As another year draws to a close, taxpayers everywhere need to take stock of their income, deductions, and credits for the year and take the necessary steps to minimize their tax bills for 2022. Here is a list of things you can do before you ring in the New Year to reduce the amount you owe Uncle Sam and pump up your refund.
- Itemizing tax deductions has become a bit more limited and complicated since the Tax Cuts and Jobs Act went into effect in 2018.
- Still, for the 2022 tax year, there are several steps that can be taken to reduce your potential tax burden come April.
- Any itemized deductions you have to charities must be documented, and you may want to consider deferring certain deductions that you cannot take now.
- For investments, choosing a suitable cost basis and timing capital gains and losses can also minimize your tax exposure.
Before You Start
Estimate your taxable income—think about wages, investment income, side gigs, and any pensions or other payments you expect to receive.
Next, figure out whether you can itemize your deductions this year. Note that the Tax Cuts and Jobs Act (TCJA) massively changed the math about whether itemizing makes sense. For the 2022 tax year the standard deduction is $12,950 for individual filers, up from $12,550 in 2021. For heads of household it's $19,400, up from $18,800 in 2021. The standard deduction for married filing jointly and surviving spouses increased to $25,900 in 2022 from $25,100 last year.1
In high-tax states, the non-itemizing trend will likely be enhanced because the TCJA capped the amount you can deduct for state and local taxes (SALT) at $10,000—or $5,000 if married, filing separately (it was previously whatever those taxes were).2
Once you have decided whether you'll itemize, review the following list and see if any of these strategies will help you minimize what you owe.
Fast Fact: The standard deduction is adjusted each year for inflation. In 2023 it increases to $13,850 for single filers, $20,800 for heads of household, and $27,700 for married filing jointly and surviving spouses.3
1. Get Deductions in Writing
If you have made any type of charitable contribution this year, get a written receipt from the receiving organization for your records—to deduct donations of more than $250, a receipt is required by the Internal Revenue Service (IRS). The IRS now requires filers to break down their contributions on Schedule A and be able to furnish proof that their contributions and deductions are genuine.4
If your non-cash gifts, such as clothing or other tangible property, exceed $500 in total value, you will now have to include Form 8323 with your return in order to claim the deduction.5 The amount that you can claim must equal the proceeds paid to the charity when your item or items are sold. However, if your donations are not sold before the end of the year, you will have to wait until they are before you can deduct them. For more, see the IRS information on substantiating non-cash contributions.4
2. Defer If You Can't Itemize
If it looks like you won’t be able to itemize your deductions this year, consider deferring substantial year-end charitable contributions until next year if you think you may have a better chance of being able to write them off. This could, for example, enable you to double next year's contribution, making it large enough to give you a better chance of qualifying for itemization.
This also goes for unreimbursed medical expenses and other types of deductible transactions or expenses over which you can control the timing. Unreimbursed medical expenses in excess of 7.5% of adjusted gross income (AGI) are deductible for all taxpayers—not just those aged 65 or older.6
Remember that if you make a charitable gift in December with your credit card and then pay it off later, it will be deductible for the month/year in which the gift was made.7
Conversely, if you can itemize your 2022 taxes, but it looks like you won't be able to do so next year, consider paying for expenses now that you might otherwise deduct in 2023. These could be charitable contributions, estimated quarterly state tax payments, medical expenses, and property taxes. Doing so could beef up your refund for 2022 with no corresponding reduction the following year, given that you probably won't be able to itemize them anyway.
3. Time Your Gains and Losses
Work with your tax planner and investment advisor (if you have one) to determine when and how to sell any appreciated or depreciated securities so that you can minimize gains and maximize losses. To deduct losses, you must be able to write them off against gains. Generally, you must be able to write off losses from selling securities you held long-term (for more than a year) against gains you made from selling other long-term securities.
Winners and losers you held short-term (one year or less) must be treated the same way. You will then compute your net long- or short-term gains and losses against each other to arrive at a final net short- or long-term gain or loss.8
If you are simply selling losers to write off against winners for 2022, be sure to place all your trades by the last business day of December at the latest in order to have them count for this year. There's a $3,000 limit on how much you can write off in one year on stock losses against your ordinary income; if you lost more, you may be able to deduct the remaining balance on your 2023 taxes.8
Important: One strategy that's too late to employ in December: selling securities that lost money, then buying them back before year-end, in order to realize the loss. The IRS Wash Sale Rule requires sellers to wait for at least 31 days to buy back losing holdings.9
4. Choose Your Cost Basis Carefully
There are several different ways to compute your cost basis, but the method you choose from one year to another can sometimes make a big difference in your taxes.
For example, if you sell a lot of shares at a very large profit and must declare this income, you may have the option of choosing to use an identical number of shares that were purchased at a higher price as the basis if they have not been used already. The rules for this can be complicated in some cases and may require professional assistance.10
If you don’t have any lots that you can use for basis at a decent price, consider simply donating some or all of your appreciated shares to charity. You can take a deduction for the full fair market value up to certain limits and escape capital gains taxes altogether as long as you have owned the securities for more than a year.7 This can be done in lieu of a cash donation, which may ease your holiday budget. Calculating and reporting cost basis will be easier from now on, as financial firms have been required by law to supply this information for all of your buy and sell transactions each year.
5. Realize Income, If Necessary
If your income in 2022 turned out to be substantially less than you had anticipated, then you may be wise to sell appreciated securities or convert a traditional IRA or retirement plan into a Roth account.11 This can allow you to use up tax credits, deductions, and exemptions that you might otherwise miss out on.
For example, if you were laid off in February and couldn’t find another job until Thanksgiving, your combined exemptions, deductions, and credit may well exceed your income for the year. You can use this opportunity to effectively reduce or eliminate your tax bill on your appreciated securities or Roth conversion by doing it now and crediting your deductions against it.
6. Make or Increase Retirement Plan Contributions
Keep cash handy to make or increase your IRA or employer-sponsored retirement plan contributions if your year-end income estimate shows that you might land in a higher tax bracket this year.
You can make IRA contributions for 2022 until the filing deadline in April 2022, but your 401(k) or 403(b) contributions must be in by Dec. 31, 2022. If you're 50 or older, remember that you can make catch-up contributions to most plans that will increase your tax deduction.1213
7. Buy for Next Year, Deduct This Year
If you're a business owner or have professional expenses that you can deduct, make upcoming necessary purchases or expenditures by the end of 2022. This will allow you to write them off for 2022 instead of next year, and thus reduce your income. This can make an especially large difference if you are buying a major item for which the purchase price can be expensed in 2022.
What Is the Standard Deduction for 2022?
For the 2022 tax year the standard deduction is $12,950 for individual filers, $19,400 for heads of household, and $25,900 for married filing jointly and surviving spouses. It increases to $13,850 for individual filers, $20,800 for heads of household, and $27,700 for married filing jointly and surviving spouses for the 2023 tax year.
When Is the Deadline to Contribute to a Retirement Plan?
You can make contributions to an IRA until the tax filing deadline in April 2022. For employer-sponsored plans, such as a 401(k) or 403(b), the contribution deadline is Dec. 31, 2022.
How Much in Stock Losses Can I Write Off?
You can write off up to $3,000 in stock losses each year. Depending on the circumstances, you may be eligible to carry forward remaining losses (up to $3,000) to the following year.
The Bottom Line
Don’t be one of those unlucky tax filers who end up asking, when they file several weeks from now, “Why didn’t I do that in December?” Except for IRAs, now is your last chance to take action to reduce your tax bill for 2022, so don’t wait any longer. For more information on how you can reduce your taxes, consult a tax planner or financial advisor. If you're self-employed, also check into additional benefits for your tax situation.
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- Internal Revenue Service. "IRS Provides Tax Inflation Adjustments for Tax Year 2022."
- Internal Revenue Service. "Topic No. 503 Deductible Taxes."
- Internal Revenue Service. "IRS Provides Tax Inflation Adjustments For Tax Year 2023."
- Internal Revenue Service. "2021 Instructions for Schedule A," Pages 11-12.
- Internal Revenue Service. "Instructions for Form 8283 (12/2021)."
- Internal Revenue Service. "Topic No. 502 Medical and Dental Expenses."
- Internal Revenue Service. "Publication 526 (2021), Charitable Contributions."
- Internal Revenue Service. "Topic No. 409: Capital Gains and Losses."
- Internal Revenue Service. "Publication 550: Investment Income and Expenses," Page 56.
- Internal Revenue Service. "Publication 550: Investment Income and Expenses," Pages 43-45.
- Internal Revenue Service. "Topic No. 309 Roth IRA Contributions."
- Internal Revenue Service. "Retirement Topics - 401(k) and Profit-Sharing Plan Contribution Limits."
- Internal Revenue Service. "IRA Year-End Reminders."