Here’s how advisors are helping clients slash their 2022 tax bill

Wealth

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If you’re feeling deflated by high inflation and stock market losses, there’s still time to end 2022 on a positive financial note.

Whether you’re sitting on losses, eager to take gains or eyeing gifts to charity, here are three real-life examples of financial advisors helping clients trim their tax bills.

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Weigh Roth IRA conversions

With the S&P 500 Index down more than 20% in 2022, many investors are eyeing Roth individual retirement account conversions, which transfer pre-tax IRA funds to a Roth IRA for future tax-free growth. The trade-off is paying an upfront tax bill. 

However, lower account balances may provide two opportunities: the chance to buy more shares for the same dollar amount and possible tax savings, depending on how much you transfer. And the tax savings may be compounded for investors during lower earning years, experts say. 

We regularly discuss Roth conversions for retired clients who haven’t started taking Social Security yet because their incomes are temporarily low.
Matt Stephens
Financial Advisor at AdvicePoint

“We regularly discuss Roth conversions for retired clients who haven’t started taking Social Security yet because their incomes are temporarily low,” said Matt Stephens, a certified financial planner with AdvicePoint in Wilmington, North Carolina. “Job changes can also provide a unique Roth conversion opportunity.”

One of his clients lost her job at the end of 2021 and didn’t start another until April, making her 2022 income much lower than usual, and her portfolio is down. “By doing a Roth conversion this year, she’ll be able to turn a hard situation into massive tax savings,” he said. 

Consider ‘tax-gain harvesting’

When the stock market is down, investors also consider “tax-loss harvesting,” or selling losing positions to offset profits. But depending on your taxable income, you may also benefit from a lesser-known move known as “tax gain harvesting.”

Here’s how it works: If your taxable income is below $41,675 for single filers or $83,350 for married couples filing together in 2022, you’ll fall into the 0% capital gains bracket, meaning you may skirt taxes when selling profitable assets.   

For some investors, it’s a chance to take gains or diversify their taxable portfolio without triggering a bill, explained Edward Jastrem, a CFP and director of financial planning at Heritage Financial Services in Westwood, Massachusetts.

With a retired client under the income thresholds, he was able to reduce their large position of a single stock, meeting their goals of “providing liquidity and reducing concentrated risk,” he said.  

Assess your charitable giving strategy

While tax breaks typically aren’t the prime reason for charitable giving, many prefer to save more taxes if given the chance. 

Philanthropic retirees commonly overlook so-called qualified charitable distributions, or QCDs, a direct transfer from their IRAs, explains Mike Wren, a CFP and CEO of Legacy Financial Strategies in Leawood, Kansas.

Rather than counting as an itemized deduction, QCDs may reduce adjusted gross income and can satisfy yearly required minimum distributions.  

Recently, he met with a couple paying more than $30,000 in required minimum distributions who were separately donating money to their church, rather than transferring tax-free funds from their IRA.

“They were claiming thousands more in taxable income then necessary,” Wren said. 

If you’re age 70½ or older, you may use QCDs to donate up to $100,000 per year. And transfers at age 72 or older may count as required minimum distributions. “Clients over 70½ really need to pay close attention to their personal circumstances,” Wren added. 

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