Tax Planning

Saving more in taxes requires tax planning during the year.

The 2020 CARES Act applied for 2018, 2019, and 2020 taxes and TCJA returns in 2021.

TCJA did not change trader tax status, Section 475 MTM, wash-sale loss rules on securities, and more. But there are many things to consider, including 2021 inflation adjustments in income and capital gains tax brackets, various income thresholds and caps, retirement plan contribution limits, standard deductions, and more. See the 2021 and 2022 Tax Brackets at TaxFoundation.org.

DEFER INCOME AND ACCELERATE TAX DEDUCTIONS

Consider the time-honored strategy of deferring income and accelerating tax deductions if you don’t expect your taxable income to decline in 2023. Even if the tax rates are the same for 2022, the IRS will adjust the tax brackets for inflation. Traders can enjoy the time-value of money with income deferral.

Year-end tax planning is a challenge for traders because they have wide fluctuations in trading results, making income difficult to predict. Those expecting to be in a lower tax bracket in 2023 should consider income deferral strategies. Conversely, a 2022 TTS trader with ordinary losses waiting to be in a higher tax bracket in 2023 might want to consider income acceleration strategies.

Taxpayers with trader tax status in 2022 should consider accelerating trading business expenses, such as purchasing business equipment with full expensing.

Don’t assume that accelerating itemized deductions is also a smart move. TCJA suspended and curtailed various itemized deductions after 2017, so there is no sense in expediting a non-deductible item. Even with the acceleration of deductible expenses, many taxpayers will be better off using the 2022 standard deduction. If itemized deductions are below the standard deduction, consider a strategy to “bunch” them into one year and take the standard deduction in other years.

ESTIMATED INCOME TAXES AND AMT

Those who have reached the SALT cap don’t need to prepay 2022 state estimated income taxes by Dec. 31, 2022. Taxpayers should pay federal and state estimated taxes owed by Jan. 15, 2023, and the balance by April 15, 2023.

Many traders skip making quarterly estimated tax payments during the year, figuring they might incur trading losses later in the year. They can catch up with the Q4 estimate due by Jan. 15 but might still owe an underpayment penalty for Q1 through Q3 quarters. Some rely on the safe harbor exception to cover their prior year’s taxes. (See https://greentradertax.com/traders-should-focus-on-q4-estimated-taxes-due-january-18/

TTS S-Corp traders should consider withholding additional taxes on year-end paychecks in connection with retirement plan contributions, which helps avoid underpayment penalties since the IRS treats wage withholding as being made throughout the year.

In years before 2018, taxpayers had to figure out how much they could prepay their state without triggering alternative minimum tax (AMT) since state taxes are not deductible for AMT taxable income. It’s easier in 2021 with SALT capped at $10,000 and because TCJA raised the AMT exemptions, which are indexed for inflation.

If Congress raises the SALT cap, AMT may snag more upper-income folks again. See Chapter 19.

For more information, see Green’s Trader Tax Guide, Chapter 9, Tax Planning.