General tax planning strategies for individuals include accelerating or deferring income and deductions and carefully considering timing-related tax planning strategies concerning investments, charitable gifts, and retirement planning. For example, taxpayers might consider using one or more of the following strategies:

INVESTMENTS. Selling any investments on which you have a gain (or loss) this year. See Investment Gains and Losses below for more on this.

YEAR-END BONUS. If you anticipate a higher taxable income in 2022 (e.g., you are retiring in 2023), and are expecting a bonus at year-end, try to get it before December 31 to reduce your tax liability in 2022. Bonuses are taxed differently than wages. For most people, the rate is 22 percent; however, for payments exceeding $1 million, the rate is 37 percent.

Contractual bonuses are different in that they are typically not paid out until the first quarter of the following year. Therefore, any taxes owed on a contractual bonus would not be due until you file your 2023 tax return in 2024. Please call the office if you have any questions about this.

CHARITABLE DEDUCTIONS. Bunching charitable deductions every other year is also a good strategy if it enables the taxpayer to get over the higher standard deduction threshold under the Tax Cuts and Jobs Act of 2017 (TCJA). Another option is to put money into a donor-advised fund that enables donors to make a charitable contribution and receive an immediate tax deduction. A public charity manages the fund on behalf of the donor and, in turn, recommends how to distribute the money over time. Don’t hesitate to call if you want more information about donor-advised funds.

MEDICAL EXPENSES. Medical expenses are deductible only to the extent they exceed a certain percentage of adjusted gross income (AGI); therefore, you might pay medical bills in whichever year they would do you the most tax good. In 2022, these medical and dental expenses must exceed 7.5 percent of AGI. By bunching medical expenses into one year rather than spreading them out over two years, you have a better chance of exceeding the thresholds, thereby maximizing the deduction.

Deductible expenses such as medical expenses and charitable contributions can be prepaid this year using a credit card or check. You can only deduct the medical and dental expenses you paid this year – not payments for medical or dental care you will receive in the future. For example, suppose you charge a medical expense in December but pay the bill in January. Assuming it’s an eligible medical expense, you can take the deduction on your 2022 tax return.

STOCK OPTIONS. If your company grants stock options, you may want to exercise the option or sell stock acquired by exercising an option this year. Use this strategy if you think your tax bracket will increase in 2023. Generally, exercising this option is a taxable event; the sale of the stock is almost always a taxable event.

INVOICES. If you’re self-employed, send invoices or bills to clients or customers this year to be paid in full by the end of December; however, make sure you keep an eye on estimated tax requirements. Conversely, if you anticipate a lower income next year, consider deferring sending invoices to next year.

WITHHOLDING. If you know you have a set amount of income coming in this year that is not covered by withholding taxes, there is still time to increase your withholding before year-end and avoid or reduce any estimated tax penalty that might otherwise be due.

Avoid the penalty by covering the extra tax in your final estimated tax payment and computing the penalty using the annualized income method.

Strategies commonly used to help taxpayers minimize their tax liability include accelerating or deferring income and deductions. Which strategy you use depends on your current tax situation.

Most taxpayers anticipate increased earnings from a job or investments from year to year, so this strategy works well. On the flip side, if you are retiring and anticipate a lower income next year or you know you will have significant medical bills, you might want to consider deferring income and expenses to the following year.

In cases where tax benefits are phased out over a certain adjusted gross income (AGI) amount, a strategy of accelerating income and deductions might allow you to claim larger deductions, credits, and other tax breaks for 2022, depending on your situation. These types of tax benefits include Roth IRA contributions, child tax credits, higher education tax credits, and deductions for student loan interest.

Accelerating income into 2022 is also a good idea if you anticipate being in a higher tax bracket next year. It is especially true for taxpayers whose earnings are close to threshold amounts, making them liable for the Additional Medicare Tax or Net Investment Income Tax ($200,000 for single filers and $250,000 for married filing jointly). See more about these two topics below.

Taxpayers close to threshold amounts for the Net Investment Income Tax (3.8 percent of net investment income) should pay close attention to “one-time” income spikes such as those associated with Roth conversions, sale of a home or any other large asset that may be subject to tax.

Examples of accelerating deductions include:

Taxpayers whose income exceeds certain threshold amounts ($200,000 single filers and $250,000 married filing jointly) are liable for an additional Medicare tax of 0.9 percent on their tax returns. They may, however, request that their employers withhold additional income tax from their pay to be applied against their tax liability when filing their 2022 tax return next April.

High net-worth individuals should consider contributing to Roth IRAs and 401(k) because distributions are not subject to the Medicare Tax. Also, if you’re a taxpayer who is close to the threshold for the Medicare Tax, it might make sense to switch Roth retirement contributions to a traditional IRA plan, thereby avoiding the 3.8 percent Net Investment Income Tax (NIIT) as well (more about the NIIT below).

The alternative minimum tax (AMT) applies to high-income taxpayers that take advantage of deductions and credits to reduce their taxable income. The AMT ensures that those taxpayers pay at least a minimum amount of tax. In 2022, the phaseout threshold increased to $539,900 ($1,079,800 for married filing jointly). Both the exemption and threshold amounts are indexed for inflation.

AMT exemption amounts for 2022 are as follows: