As we near the end of 2022, year-end financial planning discussions with clients are likely already taking shape. It’s been a year of interesting developments – from the pandemic relief that kept coming to the emergence of new programs centered around student loan debt – and customers will look to you to help them navigate these changes. Having this checklist in your pocket can make your planning meetings with clients more productive and help them stay on track.
1. Increase pension contributions to the maximum
workplace accounts. Encourage your customers to consider maximizing their contributions to their company plans and take full advantage of all employer benefits. For 2022, the maximum employee deferral for 401(k), 403(b), and 457 accounts is $20,500, and individuals age 50 and older can defer an additional catch-up contribution of $6,500. For SIMPLE IRAs, the deferral remains $14,000 and the catch-up amount is $3,000.
Traditional IRAs. Another option is to maximize contributions to a traditional IRA. For 2022, the contribution limit is $6,000 or 100 percent of earnings, whichever is lower, with a catch-up of $1,000 for customers age 50 and older. The modified adjusted gross income (MAGI) limits for contributions to traditional and Roth IRAs were increased in 2022, so make sure you do so Check the MAGI eligibility thresholds.
2. Spend FSA dollars and contribute to HSAs
If an employer’s plan allows, an individual may carry over unused Health Flexible Spending Account (FSA) funds with a maximum carryover amount of $570. Although the rollover option applies to the employer’s plan year and not the calendar year, this year-end assessment is a good reminder to make sure your clients are on the right track. Additionally, clients with dependent FSAs can save up to $5,000 (family limit) or $2,500 (split marriage) in 2022.
Now is also a good time to talk to customers who have high-deductible health plans (HDHPs) about maximum Health Savings Account (HSA) contributions. While this can be a fairly complex area of planning, HSA limits generally work as follows: In 2022, the maximum contribution for an individual HSA is $3,650 and the maximum contribution for a family HDHP is $7,300.
In addition, customers 55 and older can donate an additional $1,000. Don’t forget to discuss prorated contributions versus the “Last Month Rule” for customers who had an HDHP for part of 2022.
3. Evaluate border and capital gains tax matters
Clients who are on the cusp of a tax bracket may be able to move into the lower tax bracket by deferring a portion of their income to 2023. Here are some thresholds to keep in mind:
37 percent marginal tax rate: Taxable income above $539,900 (single), $647,850 (joint marriage), $539,900 (head of household) and $323,925 (single marriage)
20 percent capital gains tax rate: Taxable income above $459,750 (individual), $517,200 (jointly filed marriage), $488,500 (head of household) and $258,600 (separately filed marriage)
Additional Medicare tax: For customers with W-2 or self-employment income above a certain level MAGI thresholds, in total Medicare taxes are 2.35 percent and 3.8 percent, respectively
3.8 percent surcharge on capital gains: The lesser of net investment income or excess of MAGI greater than $200,000 (individual), $250,000 (jointly filed marriage), $200,000 (head of household) and $125,000 (separately filed marriage)
4. Review and rebalance portfolios
Year-end financial planning should include a review of your clients’ capital gains and losses and an assessment of whether it is time to rebalance client portfolios. This process can uncover tax planning opportunities, such as exploiting losses to offset capital gains.
5. Take advantage of the tax benefits of charitable donations
Charitable donations made directly to a qualifying charity or donor-recommended fund may qualify for a federal tax deduction. Note, however, that this strategy is only beneficial when the deductions are itemized. Therefore, it is worthwhile for clients to discuss with their tax advisors whether their charitable donations exceed the standard deduction in addition to other deductions.
Deductions from contributions to donor-recommended funds are limited to 60 percent of the AGI for cash and 30 percent of the AGI for long-term valued securities.
Qualified Charitable Distribution (QCD) rules have not changed, allowing customers over the age of 70½ to send up to $100,000 in QCD directly to a charity; Married co-applicants can exclude up to $100,000 donated from each spouse’s IRA. In addition, a QCD can be beneficial from a tax perspective as it reduces taxable income while still meeting the RMD requirement.
6. Prepare a stock options strategy
The alternative minimum tax (AMT) exemption limits were increased in 2022 to $75,900 for single taxpayers and $118,100 for married taxpayers. Depending on AMT projections, customers may wish to wait until January 2023 to exercise incentive stock options.
7. Plan estimated taxes and RMDs
A retiree’s first RMD must be completed by April 1 of the year after they turn 72. After the first year, he must meet his annual RMD distribution by December 31 for each subsequent year. If a taxpayer decides to delay the first RMD until April 1, they must claim it other RMD before year-end (i.e. essentially two RMDs in the first year if delayed).
Customers who may face an estimated tax penalty may request employers (via Form W-4) to adjust their withholding to cover shortfalls. The IRS Withholding Tax Estimator can be a valuable resource here. You could also explore usage Form 1040-ES make their estimated quarterly payments on income that is not subject to withholding tax.
8. Get ready for your student loan repayment
Student loan payments are scheduled to resume in early 2023. Under the Biden administration’s one-time student loan debt relief plan, payments on most student loans would be reduced to 5 percent of discretionary income. More information on this plan will be announced in the coming days and weeks. To get the latest information, your customers can find helpful information here data sheet and sign up for updates to US Department of Education website.
9. Evaluate estate plans
It’s always a good idea to review estate plans as part of year-end financial planning. Depending on a client’s net worth, establishing a defective grantor trust, a spousal life access trust, or an irrevocable life insurance trust can be an effective strategy for reducing the estate tax burden.
When reviewing a client’s estate plan, be sure to update beneficiary designations and review trustee appointments, power of attorney provisions, and health policies.
Be a trusted resource and guide
While this year-end financial planning checklist covers many topics, it is intended to serve as a springboard for your planning discussions with clients.
They have a good starting point to discuss key issues and deadlines that are most relevant to them, and have the opportunity to proactively engage and offer to work with accountants, attorneys and other professionals they work with. These planning meetings are just one of many opportunities available to you to demonstrate the value you deliver and deepen your customer relationships.
Of course, it’s likely that many customers have more complicated issues to consider. Learn how having a team of experts available can be critical to your practice and clients.
Commonwealth Financial Network® does not provide legal or tax advice. You should consult a legal or tax advisor regarding your individual situation. Third party links are provided as a convenience to you and for informational purposes only. We do not guarantee the completeness or correctness of the information provided on these websites.
Editor’s note: This post was originally published in October 2021, but we have updated it to provide you with more relevant and updated information.