There's Plenty That Can Be Done to Reduce This Year's Tax Burden
By Saghir A. Aslam
Rawalpindi, Pakistan
(The following information is provided solely to educate the Muslim community about investing and financial planning. It is hoped that the Ummah will benefit from this effort through greater financial empowerment, enabling the community to live in security and dignity and fulfil their religious and moral obligations towards charitable activities)
Strategize charitable donations
There's no $300 or $600 donation deduction for non-itemizers this year, unlike for 2020 and 2021. So, givers should focus on three key tax breaks for donations.
One is to bunch gifts and take them in some years but not others. For example, say Robert and Susan are married and give $10,000 a year to charity. But that and other deductions totaling $10,000 will come to less than the $25,900 standard deduction for 2022. By making two years of donations in either 2022 or 2023, the couple could take the standard deduction in one year and itemize for the other and maximize overall tax breaks.
Another strategy: donate appreciated investments held longer than a year. Donors can often take a deduction for the fair-market value of an asset without owing tax on its growth. Conditions and limits apply.
Donors who either bunch deductions or give appreciated assets may want to use a donor-advised fund, or DAF. These allow the donor to take an upfront deduction and wait until later to direct donations to specific charities. These funds can be convenient, but they have fees.
Finally, tax filers age 70 and older can donate traditional IRA assets. Each IRA owner can transfer up to $100,000 directly to one or more charities and have the donation count toward their required minimum payout, if any.
There's no deduction for these gifts, known as qualified charitable distributions, but the withdrawals don't count as taxable income either. That helps to reduce income-adjusted Medicare premiums and taxes on investment income, among other things, and allow the donor to take the standard deduction.
Consider harvesting investment losses .
It has been a brutal year for markets, but investors holding securities in taxable accounts have a bit of good news. They can sell losers, book a capital loss, and use that to offset current or future capital gains on winners, plus up to $3,000 of ordinary income like wages per year.
Those who still like the investment can even harvest losses by selling and then repurchasing the same holding-as long as it's not within 30 days before or after the sale. That runs afoul of the "wash-sale" rules and delays use of the loss.
Check out a Roth IRA conversion.
This move involves transferring traditional IRA assets into a Roth IRA and paying tax at ordinary income rates on the conversion amount.
In return, withdrawals from the Roth account can be tax-free. If the funds stayed in the traditional IRA, withdrawals would typically be taxed at ordinary income rates like wages.
Two factors favoring conversion: If the saver's tax rate at conversion will be lower than at withdrawal, and if the conversion tax can be paid with funds outside the IRA.
Make a game plan for inherited IRAS.
This year, the IRS issued rules detailing required annual withdrawals from inherited IRAS. These rules affect only IRAS inherited in 2020 or later.
The upshot: Heirs of traditional IRAS whose owners hadn't begun required withdrawals by death and heirs of Roth IRAS have 10 years to empty the accounts, and annual payouts aren't required during that period. Exceptions to the 10-year rule apply for heirs who are spouses, minor children (not grandchildren) of the IRA owner, and certain others.
Heirs of traditional IRAS whose owners had been taking required payouts also have 10 years to empty the accounts, with similar exceptions. But these heirs have to take required minimum payouts yearly.
Doing gig work or selling in an online marketplace? Get ready for new IRS reporting rules.
Starting this year, many more gig workers and sellers who use platforms like eBay, Airbnb, Venmo and Uber will have earnings reported to the IRS on 1099 forms than in the past.
The threshold for platforms and other payers to notify the IRS of payments is now $600, compared with at least $20,000 before the law changed. Many more payees will need to prove, if audited, why their sales of used clothes on eBay and Etsy aren't taxable.
Gig workers and platform sellers should be preparing for tax season by gathering records. Some may be behind already and need to catch up on quarterly estimated taxes for 2022.
This article is written in collaboration with Walt Hommerding senior vice president investment of Wells Fargo .
(Saghir A. Aslam only explains strategies and formulas that he has been using. He is merely providing information, and NO ADVICE is given. Mr Aslam does not endorse or recommend any broker, brokerage firm, or any investment at all, nor does he suggest that anyone will earn a profit when or if they purchase stocks, bonds or any other investments. All stocks or investment vehicles mentioned are for illustrative purposes only. Mr Aslam is not an attorney, accountant, real estate broker, stockbroker, investmentadvisor, or certified financial planner. Mr Aslam does not have anything for sale.)
