We hope you all had a wonderful Thanksgiving! I have heard of plenty of derailed plans due to illness and other inconveniences (our family certainly saw both), but hopefully you found a way to gather around the table to reflect on all that you have to be grateful for. At MPCA, we certainly put each of you near the top of that list, and we wish you the best as you head into the remainder of the holiday season.
Transitioning to things most people are not grateful for, let’s talk about taxes. In today’s financial planning piece, we’re going to go around the horn and look quickly at a few emerging or important tax considerations as year-end quickly approaches. Not all of these will apply to all of you, but hopefully you find something of good use – especially those of you who prepare your own tax returns. As always, we will add the disclaimer that this material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, tax, legal or accounting advice. You should consult your own tax, legal and accounting advisors before engaging in any transaction.
CHILD TAX CREDIT
In 2021, the child tax credit was significantly expanded, growing from $2,000 to $3,000 (or $3,600 for children ages 5 and younger). This was part of a broad series of measures to provide relief to taxpayers during the pandemic. To the surprise of many, this temporary increase actually was temporary, as the expanded amount terminated for 2022, leaving the CTC to revert to the original $2,000 total (subject to income limitations). Many taxpayers may be surprised by this at tax time. Now you won’t be one of them! That said, you will be hearing plenty about this in coming weeks, as Congress has proposed re-expanding this credit to the 2021 special amount. Our suggestion – plan for the lower amount and treat any extra as a bonus.
IRS $600 RULE
The IRS is more interested than ever in transactions involving part-time work, side gigs, and selling goods (specifically online). Following passage of the ‘American Rescue Plan of 2021’, the threshold at which you would receive a 1099-K was significantly reduced. Previously, the threshold was 200 transactions totaling an aggregate of at least $20,000. That amount is now $600, with no transaction count minimum. This applies to commercial payments (read: business – meaning you have the opportunity offset some of this income with expenses related to generating the income), not to noncommercial payments like reimbursing someone for food or rent or other one-off transactions such as selling an old piece of furniture, according to accountants. Regardless, we do think this will cause some confusion (and consternation) at tax time, so we wanted to give you a heads up. For those wanting to dig into the details, below are links to a couple of helpful resources.
After a year like this one, many investors with taxable brokerage accounts may realize capital losses. We wrote briefly about tax loss harvesting in a previous piece (access here). Having recently completed some strategic tax loss harvesting in the accounts we manage, we know many of you will enter tax season will a reportable loss, so we wanted to give further clarity on how this works. Here is a brief explanation. All realized GAINS are netted against realized LOSSES. If the resulting amount is a net loss, then up to $3,000 can be deducted against ordinary income. The remainder of any net loss is carried forward and used to offset net gains in future years. These can be carried forward in perpetuity, meaning you use them each year as needed while continuing to carry forward any remaining losses until all are exhausted. Here is a quick graphic that helps illustrate this concept:
It is important to distinguish between short-term and long-term gains and losses. You can use short-term losses to offset long-term gains, but cannot use long-term losses to offset short-term gains. Long-term and short-term gains are taxed at different rates. In the interest of keeping this brief, we’ll simply invite you to reach out to us and/or your tax professional for further guidance. Whatever you do, just don’t be this couple!
THE WASHINGTON STATE CAPITAL GAINS TAX
We wrote extensively in April 2021 about the new capital gains tax that was to take effect here in Washington State in 2022. Click here to access that piece or here to access that full series on capital gains taxation. As you may have heard, the courts held up enactment of this tax on constitutional grounds and the State has appealed this decision to the State Supreme Court. A hearing and ruling from that Court is still pending, but we believe (based on guidance from a trusted CPA) that you should plan as if this tax will be in effect for 2022 (payable in 2023). We will certainly keep you informed as further information becomes available. That said, with the markets down so significantly this year, this tax will be a moot point for many of you this year – but there are certainly many who could still be impacted (e.g. sold highly-appreciated shares during the year, sold your business, etc.). If you are one that might be paying this tax, this might be a good time to consider tax loss harvesting where applicable to help reduce (or even eliminate) this tax burden.
IMPORTANT YEAR-END DEADLINES
With year-end comes a variety of important deadlines. Here are a few of the more relevant ones:
- Charitable contributions must be completed by December 31st to be deductible for 2022.
- Required minimum distributions (RMD) must be completed by December 31st. A 50% penalty applies for any required amount not withdrawn by this date.
- Roth IRA conversions must be completed by year-end (Roth contributions are due by April 15th). Don’t confuse the two. As we wrote about here, this year’s market environment may provide a good opportunity for some investors to complete a Roth conversion to aid their long-term financial plan.
- 529 contributions technically have no deadline, but if you want to max out the annual contribution limit (which equals the annual $16,000 per beneficiary from each giver), you need to complete this by year-end.
- Annual exempt gifting. Each person can give $16,000 per year to any recipient without triggering any gift tax considerations. This has to be done by year-end, as you cannot carry forward this amount from one year to the next.
Lastly, start gathering your tax documents now. Being organized and timely will win you lots of smiles and favors from your tax preparer (even if that preparer is yourself). If you have questions as you journey through year-end and/or tax time, please do not hesitate to reach out. We’re here to help (and we enjoy doing so!).