Year-End Tax Moves to Make Before 2023

The last week of 2022 is a federal employee’s or retiree’s a last opportunity to make some tax moves that could reduce how much they will owe when they file their 2022 federal tax return next spring.

It also presents a good time to start taking action on their 2023 income taxes. This column presents some of the more aggressive actions and moves that employees and retirees should consider performing during this last week of 2022.

Adjusting the Timing of Potentially Tax-Deductible Expenses

With respect to potentially deductible expenses in which timing is variable, employees and retirees are encouraged to “run the numbers” to determine whether it will be more tax beneficial to pay these expenses before the end of 2022 or pay them during 2023. One example is the mortgage interest deduction. Making an extra payment during the last week of December 2022 will allow the extra interest to be claimed on 2022 income taxes and potentially reduce 2022 income taxes

Totaling Up All Non-Retirement Account Investment Gains and Losses

Those employees and retirees who bought or sold investments in a taxable (non-retirement) account are advised to calculate how much in capital gains and losses they have realized during 2022. Sales of stocks, mutual funds, closed-end funds, exchange-traded funds (ETFs), real estate investment trusts, cryptocurrencies, and options are included.

Individuals who have unrealized losses in investments held in taxable accounts should determine if it makes sense to purposely realize (take) a loss by selling the investment. All such sales must be performed no later than December 30, 2022, the last trading date for 2022.

Individuals should be cognizant of the “wash-sale” rule. The wash-sale rule prohibits an individual who incurs a recognized loss on an investment from buying the same or a substantially identical investment within 30 days before or after the day that the investment was sold.

Recognized losses resulting from sales of investments offset recognized gains resulting from sales of investments up to an excess of $3,000. If there were more than $3,000 in net losses in 2021, then those excess losses can be carried over to 2022, up to the $3,000 limit. Any excess can be carried over to 2023, including any net losses from 2022 that are kept over the $3,000 limit.

When it Makes Sense to Combine Medical Expenses

The 7.5 percent of adjusted gross income (AGI) threshold for deducting medical, dental and vision expenses was made permanent by the Consolidated Appropriations Act of 2021. If an individual’s out-of-pocket medical, dental and vision expenses for 2022 are already close to the 7.5 percent of AGI threshold, then it makes sense to realize additional expenses between now and December 31, 2022.

Alternatively, if an individual will not be able to achieve the 7.5 percent of AGI threshold during 2022, then the individual should consider delaying paying for qualifying medical expenses until 2023.

There is a wide range of medical expenses that qualify for the medical expense deduction including medical mileage and transportation and prescription drugs. Individuals should reconstruct their medical-oriented mileage and related transportation costs they had during 2022. They may also want to consider refilling prescriptions by December 31, 2022.

Traditional IRA Owners Born During 1950 Should Take Their First IRA RMD by December 31, 2022

Those traditional IRA owners who were born during 1950 are required to take their first required minimum distribution (RMD) for 2022, no later than April 1, 2023. But they are encouraged to take that first IRA RMD by December 31, 2022.

The reason: If they wait until early 2023 (during January, February or March 2023) to take that first traditional IRA RMD (for the year 2022), they would then be required to take their second traditional IRA RMD (for 2023) no later than December 31, 2023. The result would be two RMDs in one calendar year, resulting in more income and likely additional taxes to pay for the year 2023.

Make a Roth IRA Conversion

The down stock market during 2022 has made Roth IRA conversions somewhat more attractive. The reason: Converting a traditional IRA that is down in value means that fewer taxes will have to be paid compared if a traditional IRA is up in value. Roth IRA conversions make sense if a traditional IRA owner expects to be in a higher tax bracket at the time an IRA is withdrawn.

The advantages of a Roth IRA conversion include tax-free withdrawals and no RMDs. Conversions are fully taxable in the year of conversion and cannot be undone.

Any traditional IRA owner who is considering a Roth IRA conversion should make sure they have a sufficient amount of liquid assets (cash) to pay the federal and state income taxes that are due on the conversion. The deadline for completing a Roth IRA conversion for 2022 is December 31, 2022.

Contribute to a Health Savings Account

Those federal employees who are enrolled in a high deductible health plan (HDHP) through the Federal Employees Health Benefits (FEHB) program are able to make tax deductible contributions to their Health Savings Account (HSA) associated with their HDHP. Any employee enrolled in Medicare is not eligible to contribute to an HSA.

An HSA offers a “trifecta” tax benefit in the sense that contributions are tax deductible, earnings (interest, dividends and capital gains) accrue tax-free, and all qualified withdrawals used to pay out-of-pocket medical, dental and visions expenses are tax-free.

The HSA contribution limits for 2022 are $3,650 for those employees with self only FEHB enrollment coverage and $7,300 for those employees withs self plus one or self and family coverage. An additional $1,000 per year can be contributed by those employees aged 55 or older during 2022.

The manner in which federal employees contribute to their HSAs is as follows: An employee who is enrolled in an FEHB program HDHP contributes 25 to 28 percent HDHP premium, which is deducted from their bi-weekly gross salary. The employee’s agency contributes the other 72 to 75 percent of the HDHP premium. A portion of the agency’s HDHP premium is automatically contributed to the employee’s HSA, called the “premium pass-through”.

The difference between what the employee is allowed to contribute for the year and the year’s “premium pass-through” is what the employee can voluntarily contribute. The employee’s voluntary contribution to his or her HSA is fully tax-deductible as an “adjustment to income” with no adjusted gross income limitations.

Employee contributions made to their HSA are reported on IRS Form 1040, Schedule 1 line 13, as shown here on the 2022 Form 1040:

Example. Jill, age 56, is single and enrolled in an FEHB program HDHP during 2022. The “premium pass-though” with her HDHP is $2,800. Jill is allowed to contribute to her HSA a total of $4,650 ($3,650 plus $1,000) during 2022. On December 27,2022 Jill contributes a total of $4,650 less $2,800 or $1, 850 to her HSA. When Jill files her 2022 federal income taxes in spring 2023, she will be able to deduct her $1,850 HSA contribution on Form 1040, Schedule 1, Line 13 (after using Form 8889). If Jill is in a 24 percent federal marginal tax bracket, her $1,850 HSA contribution will reduce her 2022 federal income liability by 24 percent of $1,850, or $444.

Note that federal employees who are eligible to contribute to their HSAs have until the 2022 federal income tax filing deadline of April 18, 2023 to make their 2022 HSA contributions.