2022 Year End Planning Letter
2022 Year End Planning Letter
November 2022
To Our Clients and Friends,
We’re approaching the end of the year, which means it’s time to review your year-end tax plans. First, let’s take a look at 2022’s legislative actions. There was a lot of focus on President Biden’s Build Back Better Act, which proposed a broad array of tax changes with an eye on high-income households and corporations. In the end, Congress settled for the Inflation Reduction Act, a significantly trimmed down version of President Biden’s original proposal. Tax rate increases did not make the final cut. Although the changes made by the Inflation Reduction Act generally aren’t effective until 2023, the legislation features a variety of new energy and climate-related provisions including clean fuel vehicle credits and an extension of the residential solar credit (discussed below).
Planning Ideas for Individuals
• Look for ways to defer taxable income - Defer taxable income (which includes accelerating deductions) when it makes sense. For example, you anticipate being in a lower tax bracket next year due to changed financial circumstances, or if doing so will enable you to claim larger deductions, credits, and other tax breaks for 2022. Note, however, that in some cases, it may actually pay to accelerate income into 2022. For example, you anticipate being in a higher tax bracket next year or you expect to have a more favorable filing status.
• Maximize contributions to your retirement plan or IRA - Some individuals may be able to reduce their taxable income by increasing contributions to retirement plans such as a 401(k). For 2022, the maximum 401(k) contribution is $20,500, with an additional $6,500 catch up allowed for participants aged 50 and above. The 2022 maximum pay-in to an IRA is $6,000, plus an extra $1,000 if age 50 and older. You have until April 17, 2023 to make your 2022 IRA contribution.
• Evaluate your investment assets with an eye toward selling - Look at your investment portfolio to see if selling before year-end makes tax sense. If you have recognized capital losses this year (or have capital loss carryovers from previous years), you can use those losses to shelter 2022 capital gains. So, you can sell some winners before year-end without increasing your 2022 tax liability. Even if you don’t have capital gains to shelter this year, selling some losers could make sense, especially if you think they will continue to decline in value. The result would be a net capital loss for the year, which can be used to shelter up to $3,000 ($1,500 if you file MFS) of 2022 ordinary income from salaries, bonuses, self-employment income, interest income, etc. Any excess net capital loss from this year is carried forward indefinitely.
• Bunch itemized deductions to maximize their value - You can deduct the greater of your itemized deductions (mortgage interest, charitable contributions, medical expenses, and taxes) or the standard deduction. For 2022, the standard deduction is $25,900 for joint filers, $19,400 for HOH, and $12,950 for single taxpayers (including married taxpayers filing separately). Due to the higher standard deduction amounts, a lot of taxpayers get little or no benefit from their itemized deductions. If your total annual itemized deductions for 2022 will be close to your standard deduction amount, consider bunching your expenditures so that they exceed the standard deduction in one year, and then use the standard deduction in the following year. For example, consider making planned 2023 charitable contributions in 2022 if you are able to do so.
• Convert an IRA to a Roth IRA - If you expect your 2022 income to be lower than it will be in the future, consider converting IRAs to Roth IRAs.
• Donate appreciated assets that were held for over a year - If you give such assets to a public charity, you can deduct the full fair market value of the donated asset while avoiding the tax you would have paid had you sold the asset and donated the cash to the charity.
• Consider a direct transfer from your IRA to a charity - If you are age 70½ or older you can make what is known as a Qualified Charitable Distribution (QCD). While you will not be able to claim a charitable donation for the amount transferred to the charity, the QCD counts toward your Required Minimum Distribution (RMD) and is not included in taxable income. For taxpayers who don’t itemize, that’s clearly better than taking a fully taxable RMD and then donating the amount to charity.
• Take advantage of the annual gift tax exclusion - The basic estate, gift, and generation skipping transfer tax exclusion is scheduled to fall from $12.06 million ($24.12 million for married couples) in 2022 to $5 million ($10 million for married couples) in 2026. Those amounts will be adjusted for inflation, but the long and short of it is that many estates that would escape taxation before 2026 will be subject to estate tax after 2025. If you think your estate may be taxable, annual exclusion gifts (perhaps to children or grandchildren) are an easy way to reduce your estate. The annual gift exclusion allows for tax-free gifts that don’t count toward your lifetime gifting exemption. For 2022, you can make annual exclusion gifts up to $16,000 per donee, with no limit on the number of donees. If you are married, you and your spouse can elect to gift split, so that a gift that either one of you makes is treated as if it were made one half by each spouse.
• Help your children or grandchildren with their college education - Pay tuition directly to the school. The payment is nontaxable to the student, it doesn’t count against the $16,000 gift tax exclusion, and it reduces your estate. Or, contribute to a 529 plan. You can shelter from gift tax up to $80,000 in contributions per beneficiary this year. If you put in the maximum, you will be required to file a gift tax return, however, you’ll be treated as gifting $16,000 to that beneficiary for each of the next five years.
• Take advantage of energy related credits - As part of the recently passed Inflation Reduction Act, the electric vehicle credit was extended. But, there are changes to qualifying vehicles and AGI limits will kick in on January 1, 2023. If you are already considering the purchase of a qualifying electric vehicle there is a lot to know before you decide to buy before the year end or delay your purchase until next year. Likewise for home energy improvements and residential solar. It may pay to wait until 2023 to make these energy saving commitments.
• Evaluate your health insurance - The Inflation Reduction Act also extended and expanded the health premium tax credit for those who purchase their health insurance through an exchange. The household income standards have increased for spouse and dependent care coverage, so you may want to evaluate your eligibility during your next open enrollment period.
Year-end Planning Moves for Small Businesses
• Maximize retirement plan contributions - If your business doesn’t already have a retirement plan, now is a good time to consider one. You can make deductible contributions to several types of retirement plans, while earnings in the plan accumulate tax-free until they are withdrawn.
• Plan your business asset purchases - The bonus depreciation rate is scheduled to drop from the current 100% deduction to 80% of the cost of qualified property placed in service after 2022. So, placing a qualified asset in service by the end of 2022, rather than waiting until 2023, can have a big impact since you will be able to deduct the entire cost of that asset this year. Some assets that don’t qualify for bonus depreciation are eligible for Section 179 expensing. For qualifying property placed in service in tax years beginning in 2022, the maximum Section 179 deduction is $1.08 million. This means that you could possibly write off the entire cost of business asset purchases in 2022.
• Pay your pass-through entity tax (PTET) before the year end – For partnerships and S corporations, pay the second installment of the California PTET before December 31, 2022 to reduce 2022 federal taxable income from the business.
• Take advantage of larger deductions for business meals - Normally, the deduction for business meals is limited to 50% of the meal’s total cost. However, the cost of food and beverages provided by a restaurant that is paid or incurred in 2022 is 100% deductible (assuming the meal qualifies as a business meal). If you use the per diem method to reimburse employees for business expenses, you can treat the entire meal portion of the per diem rate paid or incurred in 2022 as being attributable to food or beverages provided by a restaurant, making the meal per diem 100% deductible. As such, you may want to move any business meals originally planned for early 2023 into late 2022 to obtain the higher deduction.
• Take note of the 2022 mid-year business mileage rate change – The IRS announced an increase in the optional standard mileage rate for the final six months of 2022. From January 1 through June 30, 2022 the mileage rate is 58.5 cents per mile. From July 1 to December 31, 2022 the mileage rate is increased to 62.5 cents per mile. The optional business mileage rate is used to compute the deductible costs of operating an automobile for business in lieu of tracking actual costs.
General Reminders
- • Foreign accounts or investments - The reporting requirements for assets held overseas are increasing and the penalties for failure to report them are significant. Foreign bank accounts, notes receivable, ownership in a foreign partnership or corporation and interest in Canadian RRSP’s are some examples. The additional reporting is required with your federal tax return, and in separate reporting to the Department of the Treasury. If you have any questions about this requirement, please contact us.
• Maintain detailed records of your virtual currencies - The records should summarize (1) when the currency was received, (2) the currency’s fair market value on the date of receipt (check the applicable exchange), and (3) for what purpose you are holding the currency (investment, inventory, etc.). Let us know when you engage in a virtual currency transaction. Keeping us informed will allow us to properly report your virtual currency transactions.
• IRS Email spam & other scams - Beware of any emails, phone calls or suspicious mail you receive claiming they are from the IRS or state taxing agencies. The IRS continues to issue consumer warnings on the fraudulent use of the IRS name or logo by scamsters trying to gain access to consumers’ financial information in order to steal their identity and assets. The IRS never contacts you by email, and will always send taxpayers a written notification of any tax due via U.S. mail and not by telephone. If you receive an unexpected notice of tax due, please contact us for help before making any payment.
Through careful planning, it’s possible that your 2022 tax liability can still be significantly reduced, but don’t delay. The ideas discussed in this letter are suggestions for year end planning, but they are not a substitute for personalized professional assistance. Please call us with questions or for additional strategies on reducing your tax liability.
Sincerely,
Zackary J. McSweeney, CPA/CVA/MBA Edward J. McSweeney, CPA/ABV/CFF