Time to prepare for tax season

Time to prepare for tax season

Preparing in advance for a meeting with a tax professional can help taxpayers optimize their filing. Organizing the required documents as well as any backup for charitable donations or documents for itemizing deductions can make the time and tax filing much more efficient.

A review of the “2022 tax rates, schedules, and contribution limits” may be helpful to see key tax figures and brackets.

Here are some strategies and reminders that might be helpful when filing taxes this season.

Make sure charitable contributions are in order

  • Remember that you can only deduct charitable contributions if itemizing deductions on your tax return. Be mindful that the $300 charitable deduction ($600 for married couples) for those claiming the standard deduction expired at the end of 2021
  • For noncash contributions of $250 or more the IRS requires a receipt from the organization indicating the dollar amount or description of the property donated. If the noncash contribution exceeds $500, the taxpayer must complete form 8283 (Noncash Charitable Contributions) and provide a detailed description of the property, fair market value, as well as the method for determining the value. Larger noncash contributions (over $5,000) require a qualified appraisal
  • If you receive a benefit from the contribution (for example, a charity dinner), you can only deduct the difference between the amount donated and the fair market value of the goods or services received
  • Depending on the nature of the property donated and the type of organization, the amount of the charitable deduction will vary

Charitable giving tax benefits

how to treat charitable deductions

*If electing to base the deduction on the cost basis of the property instead of the FMV, a 50% of AGI limit applies.
†Private (operating) foundations are treated the same as public charities for purposes of deducting charitable contributions. Non-operating private foundations differ from operating foundations since they generally grant funds to other charitable organizations. These foundations do not directly perform any charitable programs or services.
‡If property is not for related use by the non-profit organization, the charitable deduction is based on the lesser of FMV or cost basis and the AGI deduction limit is 30%. If property is for related use, the deduction can be based on FMV if greater than the cost basis of the property.

Read our investor education piece, “Understanding charitable giving strategies” for more details on giving.

Consider a backdoor Roth contribution for 2022

Though there was discussion in Congress to prohibit after-tax funds held within a traditional IRA to be converted to a Roth IRA, no action was taken to eliminate this strategy. For optimal results, the IRA owner must not hold any pretax savings in an IRA (including a SEP or SIMPLE) due to the pro rata rule when reporting income on a Roth IRA conversion. To learn more about Roth conversions, see “Converting a traditional IRA to a Roth IRA.”

Understand the rules for college savings plan withdrawals

It’s important to ensure withdrawals from college savings accounts, such as 529 plans, occur in the same calendar year as the expenses are incurred. If not, the IRS may consider a portion of distributions from the college savings plan as non-qualified and subject to taxes and penalties. Also, be aware of the tax reporting forms associated with college savings plans and tuition payments since these will be needed at tax time. IRS Form 1098T is issued by the college/institution and reports tuition payments and other expenses. This form does not include room and board even though they are considered qualified higher education expenses. Families should keep records of living expenses as back-up for tax reporting. The custodian for the college savings plan will issue IRS Form 1099Q, which reports total distributions, earnings, and contributions. When considering room and board as qualified expenses for students living off campus, make sure those expenses do not exceed comparable expenses published by the school.

There is still time for sole proprietors to make a retirement contribution and reduce income for 2022

Self-employed individuals are able to fund a SEP-IRA (25% of net earnings from self-employment up to a maximum of $61,000 for 2022) and deduct contributions from taxable income as long as the contribution is made before the tax filing deadline (Tuesday, April 18, 2023, for 2022 tax returns). Additionally, recent changes in retirement laws provide similar flexibility in timing contributions for those establishing and funding individual 401(k) plans.

Married couples may consider filing options

Generally, most married couples will file a joint tax return. However, there may be circumstances where filing separate returns may make sense. For example, if one spouse has significant student loan debt, filing a separate return may assist in qualifying for an income-driven repayment (IDR) plan. Or, if one spouse has significant medical expenses, filing separately may make it easier to exceed the threshold for deducting medical expenses (deduction is available once expenses exceed 7.5% of income). Consult with a tax professional to determine the best method of filing.

Make sure to report rental income if necessary

The lodging industry has changed dramatically with the advent of options such as Airbnb. As a result, more people are renting out their homes and properties for short-term stays. As a general rule, if you rent your property more than 14 days during the year, you must report that income on your tax return. For more helpful hints, see “10 tax tips for Airbnb, HomeAway & VRBO vacation rentals.”

An advisor can help

Implementing any of these strategies may impact your overall financial plan. The best way to find out how a strategy may affect your plan is to discuss the ideas with a financial advisor familiar with your individual financial situation. They can discuss your specific situation, as well as recent changes in the tax law and how you can take advantage of them.

SECURE 2.0: Provisions and planning considerations

February 7, 2023, 1 p.m. (ET)



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