Advice From a Certified Financial Planner in Utah: Tax Planning and Your Finances in 2022

Nearly every financial decision you make can result in tax consequences. What you buy and what you sell; where you buy an asset and when you sell it; even where you own it can all impact your tax bill come April. Since no one wants to pay more taxes than they have to, this means tax planning is important to your overall financial health. Smart investors consult with a certified financial advisor in Utah who offers continuous tax planning for the best results.

Tax planning means evaluating your financial situation to make sure you’re paying the least possible taxes. Integrated tax planning should be a fundamental part of your financial planning process and not just something you think about when your tax bill comes due. By taking a year-round approach to tax planning, you’ll be better able to control how much your tax bill is ultimately for. And at Rock House Financial, we integrate tax planning into everything we do.

So how does tax planning fit into financial planning? In this page, we’ll cover how tax planning fits into each area of your finances, from financial planning to retirement and estate planning to investment management.

Chapter 1

Continuous Tax Planning Strategies Can Enhance Your Financial Gains

Tax planning enables you to forecast how selling an asset may impact your tax bill.

For instance, when you know you’ll need to sell an asset, it’s generally more tax efficient to sell something you’ve owned for more than one year rather than a shorter term holding because long-term capital gains are taxed at the lower capital gains tax rate. You could use tax loss harvesting to lower your tax bill even further by selling some assets for a loss to set off the gains you’ve accrued throughout the year.

Tax planning also helps you strategize where to hold certain investments to minimize your taxes.

For instance, if you own a security that pays a lot of interest, you might want to keep it in a tax-sheltered account like an IRA. This way, you won’t have to pay taxes on the interest payments you receive each year. On the other hand, investments that are already tax-advantaged, like municipal bonds, don’t need to be kept in a tax-sheltered account because there’s no benefit for doing so.

Tax planning is especially important around milestones, such as buying a home or entering retirement. Anytime you near a milestone or experience a change to your financial situation, you should sit down with your financial advisor or a tax professional to discuss how this change will impact your tax situation.

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Chapter 2

Successful Retirement Planning Should Include a Tax Planning Component

Tax planning is especially important when planning for retirement. Before retirement, you were likely in the accumulation stage of your life, meaning you were focused on accumulating assets and not selling them. You don’t have to pay taxes when you buy an investment, but you do when you sell it, which happens much more frequently when you enter the distribution phase of retirement.

Once you retire, you’ll likely need to use your investments for income. Finding the most tax-efficient manner to generate this income can have a major impact on your overall financial health in retirement. This is why it’s beneficial to have retirement assets in both pre-tax and after-tax accounts so you can better manage the amount of taxable income you incur in a given year. Since withdrawals from after-tax accounts are not taxed, you can use these assets to generate tax-free income.

States have different rules on how income is taxed in retirement. Utah, for instance, is one of the few states that tax Social Security benefits, but starting in 2021, the state is offering a modest tax credit for Social Security benefits.

You want to make sure you take advantage of credits such as the one Utah offers so you don’t end up giving money to the IRS that you could have kept for yourself. A financial advisor or tax planner can help you determine what retirement tax credits are available to you.

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Chapter 3

Spare your Heirs! Consider Taxes When Formulating Your Estate Plan

Unfortunately, taxes don’t end with death. Your heirs may also face a tax bill when you pass away. How you think about taxes while estate planning will determine just how big of a bill they receive.

There are several layers of taxes your estate might incur, both federal and state taxes. At the federal level, there are estate taxes and gift taxes. If the value of your taxable estate is higher than the federal exemption limit — $11.7 million for individuals (rising to $12,06 million in 2022) and $23.4 million for married couples in 2021 — it could incur estate tax when the assets are passed to someone other than your spouse. Estate taxes range from 18% to 40%, so the tax bill can be hefty.

Likewise, if your lifetime gifts exceed the federal exemption amount of $11.7 million in 2021 and $12.06 million in 2022, your estate may owe gift taxes. There’s also generation-skipping transfer (GST) tax that you might incur if you give money to relatives two or more generations younger than you or to someone 37.5 years younger than you who is not family. GST tax is equal to the highest federal estate tax rate.

States can also levy taxes on your estate. Some states have an inheritance tax; Utah isn’t one of them, but it’s still important to be aware of the state-level consequences your beneficiaries may face.

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Chapter 4

Your Investments May Benefit From Continuous Strategic Tax Planning

Tax planning should be an integral part of your investment management decisions. The investments you buy, where you hold them and when you sell them all play a part in your overall tax burden. To help minimize your tax burden, you should think strategically about your investments.

One of the simplest tax minimizing strategies is to use tax-efficient investments. For example, income from municipal bonds is generally tax-free at the federal level and can be tax-free at state and local levels, too. This can make munis a good source of income in retirement.

There are also tax-managed mutual funds where the fund manager actively works to improve the fund’s tax efficiency. Exchange traded funds (ETFs) are also generally more tax efficient than mutual funds because they aren’t required to distribute their gains each year, meaning you’re less likely to experience an unexpected windfall at year end.

Strategizing where you own certain investments can also go a long way to lowering your taxes. Investments that generate taxable income, like taxable bond funds or stock funds that have a lot of turnover, may be best suited to tax-sheltered accounts like your IRA so you won’t have to pay taxes on the income each year. Municipal bond funds and other tax-neutral investments, on the other hand, can be held in taxable brokerage accounts since they don’t produce as much taxable income.

When you sell an investment also factors into how much you’ll be taxed on any gain. Short-term gains, which are those earned on investments you held for less than one year, are generally taxed at your ordinary income rate. Meanwhile, long-term investments which you’ve held for more than one year get the more favorable capital gains tax rate.

Part of being tax efficient is understanding the tax characteristics of each investment you own. A financial advisor whose agency provides integrated tax planning can help you learn about your portfolio’s tax features and find ways to minimize your tax bill.

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Chapter 5

What You Need to Know Now: Tax Changes in 2022

The IRS made a few changes to the tax law that will take effect in 2022 so you’ll see them when you file your return in 2023. These changes will impact income, estate and gift taxes. Income tax brackets will be higher in 2022 to account for rising inflation. The new income tax brackets starting in 2022 are:

  • 35%, for incomes over $215,950 ($431,900 for married couples filing jointly)
  • 32% for incomes over $170,050 ($340,100 for married couples filing jointly)
  • 24% for incomes over $89,075 ($178,150 for married couples filing jointly)
  • 22% for incomes over $41,775 ($83,550 for married couples filing jointly)
  • 12% for incomes over $10,275 ($20,550 for married couples filing jointly)

The standard deduction is also rising to $12,950 for single filers, $25,900 for couples filing jointly, and $19,400 for heads of household filers.

The alternative minimum tax (AMT) exemption is rising to $75,900 for individuals and $118,100 for married couples, with phase out beginning at $539,900 for individuals and $1,079,800 for married filers.

Estate taxes are also changing in 2022. The estates of people who die in 2022 now have a basic exclusion amount of $12,060,000 instead of $11,700,000. Similarly, the annual gift tax exclusion will rise by $1,000 to $16,000 in 2022, up from $15,000 previously.

The IRS also made changes to the Earned Income Tax credit for low- to moderate-income families, among other changes. These changes can come any year, which highlights that tax planning should be an ongoing part of your financial strategy.

Chapter 6

Common Tax Planning Oversights That Could Diminish Your Gains in 2022 & Beyond

Tax planning can be a complicated process because tax law is so complicated. Failing to give it adequate attention in your financial life can result in missing out on important tax-saving strategies. Some of the most common tax planning oversights include not utilizing the tax benefits available to you, such as tax loss harvesting or tax-efficient investment management.

Another major oversight is not staying abreast of changes to tax law, like those discussed in the previous section. If you only learn about tax law changes when it comes time to file, it may be too late to take full advantage of these changes.

The biggest tax planning oversight, though, is simply not recognizing the importance of tax planning. It’s easy to think of taxes as simply a fact of life, but just as making healthy choices on a daily basis can lead to a healthier life overall, making tax-smart decisions throughout the year can help you keep more of your hard-earned money in your bank account and not the IRS’s.

Because Rock House Financial applies continuous tax planning to everything you do, you could be saving significant amounts each year…which helps you reach your goals faster.

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RH Advisors, LLC dba Rock House Financial is an SEC-registered investment adviser. Information presented is for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies. Investments involve risk and, unless otherwise stated, are not guaranteed. Be sure to first consult with a qualified financial adviser, legal and/or tax professional before implementing any strategy discussed herein. Past performance is not indicative of future performance.