Year-End Tax Moves That Investors Should Consider

Take your lumps

Many investors may be able to soften the blow of investment losses in their taxable accounts and transform summer lemons into lemonade. Do you own some once-promising stocks or bonds that now are underwater? If so, consider selling them, especially if you were thinking of dumping them anyway for solid investment reasons. As painful as this so-called tax-loss harvesting might sound, you can use those losses to offset realized capital gains. Moreover, many investors this year may have even larger capital losses than gains.

Investors typically can deduct as much as $3,000 of realized net losses (actual losses, not paper losses) each year from their other income, including wages. That’s the limit for married couples filing jointly and also for singles. But the annual limit is $1,500 if you’re married and filing separately from your spouse. Excess amounts get carried over into the future.

If you own securities that have tumbled this year but that you still want to own, consider selling them and repurchasing them—but take care not to violate the “wash-sale” rule and have your losses disallowed.

A wash sale typically happens when you sell stock or other securities at a loss and buy the same—or “substantially similar”—securities within 30 days before or after the sale, the IRS says. (Note that the rule applies to 30 days before or after the sale, not just 30 days after.) “You cannot deduct losses” in a wash sale, the IRS says, unless the loss was “incurred in the ordinary course of your business as a dealer in stock or securities.” However, if you violate the rule and your loss is disallowed, you typically get to add that disallowed loss to the cost of the new securities you purchased.

For more details, see a recent column by my colleague Laura Saunders.

Start thinking charitably

Many donors don’t start thinking about—much less making—their annual charitable contributions until late in the year. Sometimes as late as late December. But it’s smart to start thinking now about whether 2022 is a beneficial year, for tax purposes, to bunch charitable gifts and other deductions.

For example, if you plan to itemize your deductions for 2022 and take the standard deduction for 2023, consider making especially large tax-deductible gifts this year, bunching them into this year, rather than next year when they wouldn’t be deductible. Or if you plan to take the standard deduction for this year and itemize next year, consider delaying your donations (and other deductions, whenever possible) until 2023.

Also think about how to make gifts to your favorite charities. Many taxpayers who itemize their deductions may benefit significantly by donating stocks and other securities that have risen sharply in value and that they have owned for more than a year in a taxable account. Donors typically can deduct the market value of their gifts and avoid owing tax on those long-term capital gains.

But don’t procrastinate. You might want to do so sooner rather than later given all the market fluctuations this year. And the process can take longer than you expect.

“It’s an obvious benefit, but not everyone remembers it” at a time of broadly falling stock prices, says W. David Anderson, a retired banker in New Hampshire. Mr. Anderson and his wife recently donated to a charity more than 100 shares of a “highly appreciated” stock in which “we continue to have a large position—significantly large that our financial adviser has been encouraging us to reduce the position.” Indeed, this could be a good move for investors who now find themselves with exceptionally large positions in certain stocks or sectors because of all the market volatility this year.

Look for fund payouts

If your year-end strategy includes purchasing mutual funds, especially stock funds, beware of getting hit with a painful tax bill that could easily have been avoided. (This applies to funds held in a taxable account. It isn’t an issue for funds held in a tax-favored account such as an IRA.)

Check to see if the fund you’re tempted to buy is planning to make a sizable year-end capital-gains distribution. Many funds make their distributions in November and December. Keep in mind that those distributions typically are taxable even if you invested in that fund just before the record date. Although it’s too soon to know how big an issue this will be later this year, financial advisers say investors need to be aware of it.

“This is likely going to be a salt-in-the-wound year as far as capital-gains distributions are concerned,” says Mark Wilson, founder of MILE Wealth Management in Irvine, Calif. “Although there is no way to know at this point if distributions are going to be bigger/smaller than usual, taxable distributions of any size are especially painful in a year when those funds have lost money.” Mr. Wilson’s capgainsvalet.com site has more information on this subject.

There are several ways to avoid trouble. For example, consider waiting to invest in a fund that’s planning a large distribution until after the date to be eligible for that distribution. Or, as Mr. Wilson says, invest in that fund for a tax-favored account, such as an IRA. For more details, see my earlier column on the subject.

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Increased educator deduction: As the school year begins, educators should keep track of how much they are paying for certain classroom supplies, such as books and computer equipment, out of their own pockets. (They also should take the time to organize receipts for purchases made earlier in the year.) Eligible taxpayers can claim a deduction for those expenses even if they take the standard deduction.

For the 2022 tax year, the maximum deduction is $300, up from $250 for 2021. The limit is $600 (up from $500 for 2021) for joint filers where both spouses are eligible educators—but not more than $300 each. This is the first time these annual limits have increased since the deduction was carved out by Congress in 2002, the IRS says.

Eligible educators include kindergarten-through-grade-12 teachers, counselors, principals or aides who work in a school for at least 900 hours during the school year, according to the IRS. Both public and private school educators qualify, but home-schooling costs don’t count. For more details, see IRS News release IR-2022-148.

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Series I bond reset: The initial annualized rate for Series I savings bonds sold by the Treasury will be reset in November, based on inflation. The rate applies to the six months after the purchase is made, according to the Treasury’s website. The initial annualized rate on new bonds sold from May through October this year is currently a mouthwatering 9.62%.

The popularity of Series I bonds continues, given the high rates and their attractive tax advantages. I wrote about those tax advantages and addressed reader questions on these government-guaranteed investments in columns earlier this year.

Mr. Herman is a writer in California. He was formerly The Wall Street Journal’s Tax Report columnist. Send comments and tax questions to [email protected].

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