Tax planning is an important component of your overall financial plan. This guide provides an overview of items to be aware of both now and throughout the year, steps you can take to potentially defer taxes, and options to consider in light of current market volatility and interest rates. As you read through the guide, consider the following questions:

• Has your tax situation changed from last year?
• Do you plan to do any gifting this year?
• Do you have any estate planning concerns?
• Do you need to make changes to your estate plan?
• Are you taking advantage of current strategies to maximize your retirement income?

The guide highlights various strategies that potentially could reduce or defer taxes. Before implementing any strategy, be sure to consult with your investment, planning, legal, and tax professionals to determine the right approach for your needs, goals, and financial situation.

While tax planning is a year-round activity, keep in mind that there are key deadlines and topics to pay attention to throughout the year.

*Although December 31 is the technical date these activities need to be completed by for tax purposes, they will need to be put in process well in advance of December 31 to implement by year-end.

These are the tax tables in effect for 2022 as of publication. Legislative changes could alter these amounts later in the year. Keep in contact with your advisors throughout the year to stay current with any changes.

Short-term capital gains (gains on the sale of capital assets held one year or less) are taxed at the ordinary income tax rate for individuals and trusts regardless of filing status. Long-term capital gains tax rates are not tied to the tax brackets.

The table below shows long-term capital gains tax rates. Qualified dividends are taxed at long-term capital gains rates, while nonqualified dividends are taxed at ordinary income tax rates.

Tax loss harvesting

Capital loss harvesting can be used to reduce taxes on other reportable capital gains. This requires selling securities at a value less than their cost basis to create a loss, which is generally used to offset other recognized capital gains. With the potential for volatility in the market, harvesting capital losses should not be limited to the end of the year. Instead, consider reviewing this strategy with your advisor throughout the year to take advantage of market swings.

Prior to using this strategy, you should consider the following:

• The amount of the loss that will be generated and how that compares with your net capital gains
• Whether capital loss harvesting makes sense with the other income, losses, and deductions that will be reported on your tax return
• If the investment sold will be replaced and how the new cost basis and holding period will work with your overall wealth management strategy
• Wash sale loss rules to ensure the loss reported will not be disallowed
• The effect of capital loss harvesting on dividend distributions and transaction fees

Rebalance your investment portfolio

With volatility oftentimes a risk in the market, it is important to review your investment portfolio to determine if rebalancing is necessary to maintain your desired asset allocation. You may have some or all of your accounts set up to automatically rebalance. However, if you do not have automatic rebalancing, it is important to review your entire portfolio, including both taxable accounts and assets held in tax-advantaged accounts (such as your IRAs and 401(k) accounts).

Your tax-advantaged accounts may have limitations. For example, many 401(k) plans may not provide fund selections to allow allocations to international fixed income, real assets, or complementary strategies. When rebalancing, pay attention to the wash sale rules discussed below, as they can still be triggered if you sell a security at a loss and repurchase a substantially identical security within your IRA or tax-advantaged account.

Avoid purchasing new mutual funds with large expected capital gains distributions

Like other types of securities, you realize capital gains on your mutual fund holdings when you sell them. However, a unique feature of mutual funds is their potential annual distribution of capital gains (and losses) to shareholders. Companies that manage mutual funds announce the amount of capital gains to be distributed to shareholders near the end of the year.

The announcement includes a record date (the date of record for shareholders to receive a distribution) and an ex-date (the date the security trades without the distribution) and is typically expressed as a percentage of a shareholder’s position. For example, a 10% distribution on a $100 investment would equal a $10 distribution.

For investors looking to rebalance their portfolios, mutual fund distributions can be problematic. A rule of thumb is that you typically don’t want to buy into capital gains distributions. For example, if you sell an asset in your portfolio that has performed well, you expect to realize capital gains. You could exacerbate your capital gains issue by reallocating your rebalanced proceeds to a new mutual fund near the date of its annual capital gains distribution.

There are risks associated with investing in mutual funds. Investment returns fluctuate and are subject to market volatility, so that an investor’s shares, when redeemed or sold, may be worth more or less than their original cost.

Wash sale rules

A wash sale occurs when a security is sold at a loss and the same security, or a substantially identical security, is purchased within 30 days before or 30 days after the sale date. When a wash sale occurs, the loss recognized from the transaction is disallowed and is unable to be used to offset other gains. Instead, the amount of the disallowed loss will be added to the basis of the repurchased securities. The rule was developed to prevent investors from creating a deductible loss without any market risk.

A wash sale can be avoided by purchasing the identical security more than 30 days before the loss sale or more than 30 days after the loss sale. A security within the same sector but that is not substantially identical may be purchased at any time before or after the loss sale and will not trigger the wash sale rules.

Typically, families with significant taxable estates are strategic about how best to use the annual exclusion and their lifetime exclusion gifting by utilizing advanced strategies such as irrevocable trusts (for example, irrevocable life insurance trusts, spousal lifetime access trusts, intentionally defective grantor trusts, grantor retained annuity trusts, and charitable split interest trusts), transfers of interests in entities (such as family limited partnerships and limited liability companies), and other planning techniques.

Modern planning techniques are increasingly flexible, and some may provide mechanisms to protect your beneficiaries while also allowing you options for maintaining your own desired lifestyle. Given the market volatility and interest rates at time of publication, some of these strategies may be that much more impactful at this time. As with any strategy, there are risks to consider and potential costs involved. Discussions with your advisors can help in the education of how these strategies work and the role that depressed valuations of certain assets and low rates can play.

A modern wealth planning approach goes beyond minimizing transfer taxes and should incorporate income tax planning, asset protection, business succession planning, and family dynamics considerations such as education of heirs and beneficiaries to be financially fluent and knowledgeable about wealth stewardship expectations and/or opportunities. Before implementing any wealth transfer option, you should consider the trade-offs between lifetime transfers and transfers at death:

• Lifetime transfers usually result in the beneficiary assuming the tax basis in the gifted asset equal to that of the donor at the time of the gift. This could result in the unrealized appreciation being taxed to the beneficiary whenhe or she ultimately sells the property, although any gift or estate tax on future appreciation is usually avoided from the perspective of the donor. This typically does not apply to assets with a built-in loss.
• In contrast, if the transfer occurs at death, the beneficiary generally gets a new tax basis equal to the fair market value at death, eliminating any income tax on the unrealized appreciation. However, income tax savings on the asset may be offset by any estate tax imposed on the asset. Proper planning with your tax and other advisors should consider the trade-off between income and estate taxes and help you maximize your results over the long term. The right strategies to use will vary with the goals, assets, and circumstances of each family.

Tax rates^*

The Medicare 3.8% surtax is imposed on certain types of unearned income of individuals, trusts, and estates with income above specific thresholds. For individuals, the surtax is imposed on the lesser of the following:

• Net investment income for the tax year
• The amount by which modified adjusted gross income (MAGI) exceeds the threshold amount in that year

The threshold amounts

For trusts and estates, the surtax is imposed on the lesser of the following:

• The undistributed net investment income for the tax year
• The excess (if any) of the trust’s or estate’s adjusted gross income over the dollar amount at which the highest tax bracket begins ($13,450 in 2022)

Children with investment and other unearned income, such as dividends and capital gains, exceeding $2,300 may be subject to the kiddie tax rules. These rules apply to children that are:

• Age 17 and under
• Age 18 with earned income not exceeding half of their support
• Over age 18 and under age 24 if also full-time students with earned income not exceeding half of their support

Parents can elect to report this unearned income on their own return using Form 8814 for amounts less than $11,000. While doing so may be simpler, it may not necessarily be more tax-efficient. For example, the kiddie tax applicable to a child’s unearned income of $10,000 may be less than when claimed by a parent already subject to top tax rates.

Unearned income of children is taxed at the higher of the parents’ marginal tax rate or the child’s tax rate.

• Achieving a Better Life Experience (ABLE) accounts allow for tax-advantaged funds to help disabled individuals pay for qualified disability-related expenses.
  • Due to changes in the tax law, rollovers from 529 plans to ABLE accounts (529A plans) are permissible, subject to federal and state limitations. Be aware that rollover rules may vary by state.

As a real estate investor, you may expense 100% of new and used qualified tangible business property acquired and placed in service during 2022. In addition, the expense limitations (that is, Section 179 election) relating to the cost of certain depreciable tangible personal property used in a rental business, as well as certain nonresidential real property improvements, is $1.080 million. The maximum amount that may be spent on such property before the Section 179 deduction begins to phase out is $2.7 million.

Real estate investors may utilize Section 1031 exchanges to defer any gain realized on the sale of real estate used in a trade or business by purchasing replacement like-kind real estate. Section 1031 cannot be used for personal property or real property held primarily for sale.

The deduction for real estate taxes for personal use real estate is now limited to $10,000. The amount of this limitation also includes state and local income taxes. The mortgage interest deduction is limited to interest paid on the first $750,000 of mortgage indebtedness secured by a primary or secondary residence. However, for mortgages originating before December 16, 2017, a deduction is available for interest paid on the first $1 million of mortgage indebtedness. Interest on home equity loans and home equity lines of credit that are not used to either buy, build, or substantially improve a primary or secondary residence is not deductible. The debt must also be secured by the home the loan pertains to.

Generally, income from real estate activities is considered a passive activity. As such, if a property operates at a loss, the loss is only deductible against other passive income or may be used if you dispose of your entire interest in the activity during the year. Only real estate professionals who provide greater than 750 hours of personal services in real property trades and spend more than half of their time in real estate trade or business can fully deduct losses from real property activities. As the rules often are based on specific facts and circumstances, you should consult your tax advisor to confirm the proper deductibility of these activities.

The Tax Cuts and Jobs Act (TCJA) of 2017 introduced the Qualified Opportunity Zone (QOZ) program, providing a tax incentive for private, long-term investments in economically distressed communities. You may elect to defer tax on any capital gains invested in a Qualified Opportunity Fund (QOF), defined as an entity that is organized as a corporation or partnership and that subsequently makes investments in QOZ property. You must invest in the QOF within 180 days of the realization event. If you make the investment, you could potentially receive three valuable tax benefits:

1. The capital gains invested in the QOF are not recognized until the earlier of the QOF sale or December 31, 2026.
2. The ability to increase your basis is no longer available due to holding period requirements prior to the 2026 tax recognition.
3. If you retain your QOF for at least 10 years and then sell your interest, you may be able to exclude 100% of the capital gains on the sale of the QOF that are above your original investment. Thus, if you invest deferred capital gains in a QOF on December 1, 2022, and sell the QOF on or after December 2, 2032, you may not have to pay capital gains tax on the entire appreciation of the QOF.

These tax savings opportunities are only available if you retain your investment in the QOF for the noted time frames. A sale of the QOF before the noted dates will accelerate any deferred capital gains to that date and you may lose some of the benefits. Keep in mind that capital gains rates at the time of sale or in 2026 could be at a higher rate than in 2022.

The alternative minimum tax (AMT) calculates income tax under different rules for income and deductions. If the AMT calculation results in a higher tax, the taxpayer will be subject to AMT and pay the higher tax. Generally, a taxpayer with a high proportion of capital gains income in relation to total income may trigger the AMT, as might exercising incentive stock options.

*$103,050 if married filing separately

For specific qualified long-term care policies, the premiums are considered to be a personal medical expense and deductible by the IRS. The amount of qualified long-term premiums that will be considered a medical expense are shown in the table below.* The medical expense deduction is limited to qualified medical expenses over 7.5% of adjusted gross income.

*Limitations apply based on the type of taxpayer. You should consult your tax advisor regarding your situation.

Health Savings Accounts (HSAs) are available to participants enrolled in a high-deductible health insurance plan. At the federal level, contributions to HSAs are not subject to income tax. Distributions are tax-free as long as they are used for qualified medical expenses.

In most states, contributions to HSAs are not subject to state taxes and income earned in HSAs is tax-deferred. Similar to federal law, qualified distributions are tax-free in most states. Please consult with your tax advisor for state-specific guidance on the tax deductibility of contributions and state taxes due on earnings.

If a distribution occurs from an HSA prior to age 65 for reasons other than qualified medical expenses, ordinary income taxes along with a 20% penalty are due on the distribution amount. Distributions from HSAs after age 65 are not subject to the 20% penalty but are subject to ordinary income taxes. Contributions to HSAs can no longer be made after enrolling in Medicare (eligibility for Medicare begins at age 65).

Based on various federal income tax brackets (does not account for state taxes)

Example: A taxpayer in the 35% federal income tax bracket would have to purchase a taxable investment yielding more than 3.1% to outperform a 2.0% tax-free investment.

While the strategies in this guide can be effective in helping manage your tax burden, they are not all-inclusive or a destination in and of themselves. A better starting point is a strategic plan tailored for your specific needs and goals. That’s where LifeSync can help.

LifeSync is an ongoing advice and planning experience that creates a personal path for every individual, helping you make more informed financial decisions that more closely align with your aspirations. Whether you’re just starting out on your journey, comfortably on the way, or ensuring things are in place for the next generation, LifeSync helps your values and financial priorities stay in sync over time, answering the questions you need answered and providing the clarity you need to make the right decisions — at the right moments.

Connect with your advisor to get started. Finally, connect with your legal and tax advisors before taking any action that may have tax or legal consequences to determine how the information in this guide may apply to your specific situation at the time your tax return is filed.