From Kleshinski, Morrison & Morris, CPAs —

Dear Clients and Friends,

Today we continue our look at mid-year tax planning for 2022. In Part 2 of our three-week series, we discuss how to plan the timing of your expected investment gains and losses, and strategy for maximizing the deductions you will be eligible to take.

Time investment gains and losses

Under the current rules, the 2022 federal income tax rates on long-term capital gains are 0%, 15%, and 20% for most categories of long-term gain. As mentioned earlier, the maximum 20% rate affects singles with 2022 taxable income (including long-term gains) above $459,750, married joint-filing couples with income above $517,200, heads of households with income above $488,500, and married individuals who file separate returns with income above $258,600.

Higher-income individuals also may be hit with the 3.8% NIIT, which can result in an effective marginal federal rate of up to 23.8% (20% + 3.8%) on long-term gains. Under President Biden’s proposed tax plan, the rate on long-term gains would increase to 39.6% for taxpayers making over $1 million, which, when combined with the NIIT, would result in a marginal rate on long-term gains of up to 43.4% (39.6% + 3.8%).

Until we know exactly where the capital gains rates will fall in 2023, the best strategy at the moment is to be prepared. If rates increase, as the President’s plan indicates, it might make sense to sell winners before year end and hold on to losers until January. At this point, it’s just too early to make any decisions. However, we should be mindful of what’s coming and have a plan in place to time your transactions to result in the best possible outcome.

As you evaluate investments held in your taxable brokerage accounts, be mindful of your holding period. For most taxpayers, the federal income tax rate on long-term capital gains (gains on assets held for over a year) is still much lower than the rate on short­ term gains. This will remain true in many cases even if the long-term capital gains rates increase in 2023.

Under the proposed plan, only taxpayers making over $1 million will be affected. Therefore, it often makes sense to hold appreciated securities for at least a year and a day before selling to qualify for the lower long-term capital gains tax rate.

Biting the bullet and selling some loser securities (currently worth less than you paid for them) before year end also can be a tax­ smart idea. Again, we need to wait and see what the capital gains rates will be in 2023. Any capital losses taken before year end will offset capital gains from other sales this year, including high-taxed short-term gains from securities owned for one year or less. Under the current rules, the maximum rate on short-term gains is 37%, and the 3.8% NIIT may apply too, which can result in an effective marginal rate on short-term gains of up to 40.8% (37% + 3.8%).

Future tax legislation could increase the maximum rate on short-term gains, but it could still be significantly higher than the rate on long-term gains for taxpayers making less than $1 million. Whatever happens, you won’t have to worry about paying a high rate on short-term gains if they can be sheltered with capital losses.

If capital losses for this year exceed capital gains, you will have a net capital loss for 2022. You can use that net capital loss to shelter up to $3,000 of this year’s higher-taxed ordinary income from salaries, bonuses, self-employment, and so forth ($1,500 if you’re married and file separately). Any excess net capital loss will be carried forward to 2023.

Selling enough loser securities to create a net capital loss that exceeds what you can use this year also might make sense. You can carry forward the excess capital loss to 2023 and beyond and use it to shelter both higher-taxed short-term gains and long-term gains recognized in those years.

Plan your deduction strategy

It’s generally best to itemize your deductions if you have significant personal expenses. However, don’t rule out the standard deduction. For 2022, joint filers can enjoy a standard deduction of $25,900. The standard deduction for heads of household is $19,400, and single taxpayers (including married taxpayers filing separately) can claim a standard deduction of $12,950.

Unfortunately, tax reform passed in 2017 suspended or limited many of the itemized deductions. Although there have been talks of possible legislation that might repeal or relax some of these limitations, we don’t necessarily expect changes for 2022. The most discussed limitation at the moment is the cap on the deduction for state and local taxes, which is currently $10,000 ($5,000 if married filing separately). Nothing has been passed yet, so the $10,000 limitation continues to apply.

Taxpayers who have itemized deductions just under (or just over) the standard deduction should consider a plan to bunch state and local taxes into alternating years by paying two years’ worth of taxes in a single calendar year. However, the effect of the $10,000 cap must be considered.

In addition to bunching state and local taxes, consider bunching charitable contributions. In many instances, this can be accomplished through a donor-advised fund. Also known as charitable gift funds or philanthropic funds, donor-advised funds allow donors to make a charitable contribution to a specific public charity or community foundation that uses the assets to establish a separate fund.

Taxpayers can claim the charitable tax deduction in the year they fund the donor-advised fund and schedule grants over the next two years or other multiyear periods. If you have questions or want more information on donor­ advised funds, please give us a call.

For older taxpayers (over age 70½) who won’t itemize in 2022 but still want to make contributions, a Qualified Charitable Distribution (QCD) from an IRA is a great way to give to charity.

Making a direct contribution from the IRA to the charitable organization has the added value of not increasing the taxpayer’s Adjusted Gross Income (AGI), which can decrease the amount of Social Security benefits that is taxable, as well as affecting other favorable tax provisions that phase out based on AGI. Please note that a QCD will count towards the taxpayer’s required minimum distribution.

Check back next week in this space for Part 3 of our 2022 mid-year tax planning discussion.

KM&M CPAs: Expert individual and business accounting service

Our accounting experts at KM&M CPAs are available to handle all your individual and business accounting services. Should you need help with your mid-year tax planning, contact us. Reach us to schedule an appointment by calling 419-756-3211, sending an email to, or by filling out our contact form at this link.

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