2022 not your year for earning potential? Many of us are still feeling the effects of the pandemic reflected in our income, AND we now have inflation to deal with. Perhaps you’ve been forced to take a break from work due to personal circumstances, or maybe your business just hasn’t done that well this year. Whatever the reason for your income being substantially lower than usual in 2022, you might be able to take advantage of some tax-planning opportunities that benefit lower-income taxpayers. With a little planning now, you may end up with more in your pocket at the end of the year.
Here are some options to consider:
Delay your personal deductible expenditures
Do you typically itemize your deductions? If itemizing won’t make sense this year, consider whether you can delay the payment of certain expenses that may be more beneficial to your tax situation next year. These may be medical bills, real property tax bills, or charitable contributions—that said, be sure you’re only delaying payments that won’t incur penalties and interest.
Why wait? Well, it could be beneficial to group your itemized deductions into one year, then claim the standard deduction in the alternate year.
For example, if you:
- Make two years’ worth of charitable contributions all in one year
- Deduct the total in that year
- Contribute nothing the following year
- Take the standard deduction the following year…
…the combined tax for the two years may end up less than if you made a contribution in each year.
Exercise stock options
If you are an employee of a listed corporation, you may be offered company shares at a fixed price at some future date, allowing you to share in the company’s success through the increase in stock value.
When you exercise the option as income (and if your stock options are non-qualified), you’re required to report the difference between the stock’s value and your preferential option price.
This income will be included on your year-end W-2 form. In a year that your income is low, this may give you the chance to exercise some or all of your options with minimal (or zero) income tax liability.
Convert your traditional IRA to a Roth IRA
Many taxpayers choose to convert their traditional IRA account to a Roth IRA; Roth IRA accounts provide the benefits of tax-free accumulation and tax-free distributions once you reach retirement age. You’re generally required to pay tax on the converted amount, but if you’re experiencing a year of low or negative income due to abnormal deductions or business losses, it may be to your benefit to do so. The current standard deduction is higher than it’s ever been before, so you may have the opportunity to convert some or all of your traditional IRA to a Roth IRA with minimal conversion tax, in which case it’s definitely worth looking into before the end of the year.
Maximize IRA distributions
Contrary to what some may think, it may be tax-effective to actually withdraw more from your IRA than the minimum required by law. If you are retired and take regular IRA distributions, be sure to maximize your withdrawals according to your tax bracket. With lower-than-normal income, you may even be able to take a distribution from your IRA without any tax liability. Even if you don’t need the funds, it’s a great opportunity to take advantage of this tax-free income, which you could always bank for the future, too.
Sell appreciated stock
Income tax rates start at 10% and then increase in step amounts as your taxable income increases (up to a maximum rate of 37%). However, long-term capital gains only have three tax rates: 0%, 15%, and 20%. If your taxable income this year qualifies you for the 0% tax rate, you get a unique opportunity to sell any investments that produce long-term capital gains and benefit from 0% long-term capital gain rates. In other words, if you hold stocks that appreciated over the year, you may be able to sell them this year and pay zero tax on the gain.
Here are the 2022 taxable income ranges for 0% long-term capital gains:
- Single: $0–$41,675
- Head of household: $0–$55,800
- Married, filing jointly: $0–$83,350
- Married, filing separately: $0–$41,675
Delay business expenditures
If you are self-employed, it may be beneficial (assuming it’s feasible without harming your business) to delay business-related purchases until next year to avoid reducing your current yearly income any further. You can then save the deduction until next year when you purchase the items.
Are you the custodial parent of a child but receive no benefit from the child tax credit? You may wish to consider releasing the dependency to the non-custodial parent this year and allowing the non-custodial parent to claim the $2,000 child tax credit. This won’t affect your ability to claim the refundable earned income tax credit or the child care credit, but if the child is attending college, then any tuition credit will go to the one claiming the child. You can release the dependency on IRS Form 8332, but be sure to avoid releasing the dependency for more than one year unintentionally.
Click to learn more about child and dependent care tax credits in 2022.
Need help minimizing your tax bill?
Even when times are tough (and perhaps especially so), it pays to consult the experts. Please get in touch if you have questions about these strategies or want us to help you plan your 2022 tax year in a way that’s suited to your current financial position.