2022 YEAR-END INCOME TAX PLANNING FOR INDIVIDUALS
INTRODUCTION
It’s hard to believe we are already in the final quarter of 2022. As we begin looking forward to the possibilities of a new year, we believe it’s important to take a moment to look back and review 2022 for year-end tax planning opportunities. If you have any questions or want to discuss planning ideas not included in our letter, please call our firm so we can discuss.
Be Careful! We suggest you call our firm before implementing any tax planning technique discussed in this letter. You cannot properly evaluate a particular planning strategy without calculating your overall tax liability with and without that strategy. This letter contains ideas for Federal income tax planning only. State income tax issues are not addressed.
Also, it is possible Congress could pass new legislation between your receipt of this letter and December 31st. Please call our firm before implementing any tax planning technique discussed in this letter.
YEAR-END TAX PLANNING TECHNIQUES
in the following discussion we include year-end tax planning strategies that would allow you to accelerate your deductions into 2022, while deferring your income into 2023. Caution! For individuals who expect their taxable income to be much lower in 2022 than in 2023, the opposite strategy might be appropriate.
Above-The-Line Deductions Can Generate Multiple Tax Benefits. Deductions that reduce your adjusted gross income (or modified adjusted gross income) can generate multiple tax benefits such as reducing your taxable income and allowing you to be taxed in a lower tax bracket and freeing up other deductions (and tax credits) that phase out as your adjusted gross income (or modified adjusted gross income) increases.
$ Above-the-line deductions include: Deductions for IRA or Health Savings Account (HSA) Contributions; Qualified Student Loan Interest; Qualifying Alimony Payments Educator Expenses; and, Health Insurance Premiums for Self-Employed Individuals.
Postponing Taxable Income May Save Taxes. Generally, deferring taxable income from 2022 to 2023 may have the same effect as accelerating deductions, particularly if your effective income tax rate for 2023 will be lower than your effective income tax rate for 2022
Itemized Deductions. Although itemized deductions (i.e., below-the-line deductions) do not reduce your adjusted gross income or modified adjusted gross income, they still may provide valuable tax savings.
$ Charitable Contributions. If you think your itemized deductions this year could likely exceed your Standard Deduction of $25,900 if filing jointly ($12,950 if single) and you want to accelerate your charitable deduction into 2022, please note that a charitable contribution deduction is allowed for 2022 if the check is mailed on or before December 31, 2022, or the contribution is made by a credit card charge in 2022. However, if you merely give a note or a pledge to a charity, no deduction is allowed until you pay the note or pledge. In addition, if you are considering a significant 2022 contribution to a qualified charity (e.g., church, synagogue, or college), it will generally save you taxes if you contribute appreciated long-term capital gain property, rather than selling the property and contributing the cash proceeds to the charity. By contributing capital gain property held more than one year (e.g., appreciated stock, real estate, Bitcoin, etc.), a deduction is generally allowed for the full value of the property, but no tax is due on the appreciation. If instead you intend to use “loss” stocks to fund a charitable contribution, you should sell the stock first and then contribute the cash proceeds. This will allow you to deduct the capital loss from the sale, while preserving your charitable contribution deduction.
$ Casualty Losses. From 2018 through 2025, the itemized deduction for personal casualty losses and theft losses has been suspended. However, personal casualty losses attributable to a Federally-declared disaster continue to be deductible. Returns extended to October 17, 2022 are now due February 15, 2023 for Florida, South Carolina, and North Carolina residents and businesses.
$ Medical Expense Deductions. If you think your itemized deductions this year could likely exceed your standard deduction of $25,900 if filing jointly ($12,950 if single), but you do not expect your itemized deductions to exceed your Standard Deduction next year, you could save taxes by accelerating elective medical expenses (e.g., braces, new eye glasses, etc.) into 2022. For 2022, you are allowed to take a medical expense itemized deduction only to the extent your aggregate medical expenses exceed 7.5% of your AGI.
$ $10,000 Cap On State And Local Taxes. From 2018 through 2025, your aggregate itemized deduction for state and local real property taxes, state and local personal property taxes, and state and local income taxes is limited to $10,000. Most states have enacted legislation allowing partnerships and S corporations to elect to pay state and local income taxes on the partnership’s or S corporation’s income. If this election is made, the state and local taxes paid by the partnership or S corporation are deductible by the entity and reduce the income flowing through to the partners or shareholders. States either give the partners or S corporation shareholders a state credit or deduction on their personal returns for the state and local tax paid or income reported by the entity.
Consider Contributing the Maximum Amount To Your Traditional IRA. As you evaluate how much you should contribute to your IRA, consider the following limitations. If you are married, even if your spouse has no earnings, you can generally deduct in the aggregate up to $12,000 ($14,000 if you are both at least age 50 by the end of the year) for contributions to you and your spouse’s traditional IRAs. You and your spouse must have combined earned income at least equal to the total contributions. However, no more than $6,000 ($7,000 if at least age 50) may be contributed to either your IRA account or your spouse=s IRA account for 2022. If you are an active participant in your employer=s retirement plan during 2022, your IRA deduction is reduced ratably as your adjusted gross income increases from $109,000 to $129,000 on a joint return ($68,000 to $78,000 on a single return). However, if you file a joint return with your spouse and your spouse is an active participant in his or her employer=s plan and you are not an active participant in a plan, your IRA deduction is reduced as the adjusted gross income on your joint return goes from $204,000 to $214,000.
IRS Increases Standard Mileage Rates Effective July 1, 2022. The standard mileage deduction rate for your deductible business miles was increased from 58.5 cents per mile to 62.5 cents per mile effective July 1, 2022. In addition, the rate for medical and moving mileage increased from 18.0 cents per mile to 22.0 cents per mile. Be sure to keep proper records for business, medical/moving, and charitable mileage for use as a possible deduction for 2022.
Gift And Estate Tax Planning. For 2022, a donor can gift $16,000 to each donee. It is not a taxable gift to the donor and gifts are not included in the recipient’s income. That exclusion amount will go to $17,000 in 2023. Using the annual gift tax exclusion is an effective tool to move assets out of your estate without creating any gift tax.
HIGHLIGHTS OF PROVISIONS INCLUDED IN THE INFLATION REDUCTION ACT OF 2022
On August 16, 2022, President Biden signed the Inflation Reduction Act of 2022. The following is a summary of selected provisions included in the Inflation Reduction Act that could impact your 2022 tax planning.
Extension Of American Rescue Plan Act Premium Tax Credit Provisions Through 2025. The American Rescue Plan Act modified the tables for calculating the Premium Tax Credit. The modification results in a greater Premium Tax Credit than for years prior to 2021. In addition, The American Rescue Plan Act removed the provision denying the Premium Tax Credit where household income exceeded 400% of the Federal Poverty Line. For example, according to the Congressional Budget Office, a 45-year-old single individual with income of $58,000 (450% of the FPL) in 2021 would not have been eligible for the Premium Tax Credit under pre-American Rescue Plan Act law. Under the American Rescue Plan Act, that individual would be eligible for a PTC of about $1,250 for 2021. Both of these provisions were extended by the Inflation Reduction Act of 2022 through 2025.
Credit For Energy Efficient Residential Property Improvements. The credit for residential energy property improvements made to an individual’s principal residence was 10% of the amount paid or incurred up to a maximum $500 lifetime limitation. The credit expired at the end of 2021. The Inflation Reduction Act extends this credit through 2022 and provides a new expanded credit for qualifying improvements to residential property after 2022 and before 2032. The Inflation Reduction Act provides an increased 30% credit generally with an annual $1,200 limitation for qualified energy efficient residential property improvements after 2022 and before 2032. These improvements must be made to a dwelling owned and used by the taxpayer. If you are planning to make residential property improvements qualifying for the new increased credit, you may want to wait until 2023 since the credit could be much larger. In addition, you would receive no credit in 2022 if you have already exceeded your $500 lifetime limitation for energy efficient improvements prior to 2022.
Modification To Existing EV Credit Qualification For Vehicles Purchased After August 16, 2022. Changes made by the Inflation Reduction Act to the electric vehicle (EV) credits are generally effective for vehicles purchased after 2022. However, for an EV purchased after August 16, 2022, the IRA requires the final assembly of the vehicle to occur in North America to qualify for the credit. However, this “final assembly requirement” does not apply where the taxpayer entered into a written binding contract to purchase a new qualifying EV before August 16, 2022 but took possession of the EV on or after August 16, 2022. Planning Alert! IRS says “If you purchase and take possession of a qualifying electric vehicle after August 16, 2022 and before January 1, 2023, aside from the final assembly requirement, the rules in effect before the enactment of the Inflation Reduction Act for the EV credit apply (including those involving the manufacturing caps on vehicles sold).”
New “Clean Vehicle Credit” For Vehicles Purchased After 2022 And Before 2033. The IRA amends the law to provide credits for “Clean Vehicles” after 2022 and before 2033. A “Clean Vehicle” includes a qualified electric vehicle (EV) and a qualified fuel cell motor vehicle. Taxpayers are allowed a credit for a qualifying EV. The maximum credit amount is $7,500 for new EVs. The vehicle must have a minimum battery capacity of seven kilowatt hours; be manufactured primarily for use on public streets, roads, and highways; have at least 4 wheels, and have a gross vehicle weight rating (GVWR) of less than 14,000 lbs. Caution! No credit will be allowed for a new vehicle if the manufacturer’s suggested retail price of the vehicle exceeds: $80,000 for SUVs, pickups, and vans; and $55,000 for other vehicles. In addition, no credit will be allowed for a new vehicle if the lesser of current or prior year modified adjusted gross income is more than $300,000 for joint filers, $225,000 for head of households, and $150,000 for others. Planning Alert! The IRA removes the disallowance of the EV credit when the number of electric vehicles sold by a manufacturer exceeds 200,000, effective for vehicles sold after December 31, 2022. Because of this 200,000 limitation, vehicles manufactured by GM and Tesla do not qualify for a credit in 2022. However, if these vehicles meet the requirements of the new law, they will qualify if purchased in 2023. So, if you are planning on purchasing an electric vehicle manufactured by Tesla or GM, it may pay to wait until after 2022. Please call our firm if you need additional information and assistance.
Extension And Increase In Individual Energy Credit For “Qualified Fuel Cell Property,” “Qualified Small Wind Energy Property,” “Qualified Solar Electric Property,” “Qualified Solar Water Heating Property,” “Qualified Geothermal Heat Pump Property,” And “Qualified Biomass Fuel Property.” The credit for: 1) “Qualified Fuel Cell Property Expenditures,” 2) “Qualified Small Wind Energy Property Expenditures,” 3) “Qualified Solar Electric Property Expenditures,” 4) “Qualified Solar Water Heating Property Expenditures,” 5) “Qualified Geothermal Heat Pump Property Expenditures,” and 6) “Qualified Biomass Fuel Property Expenditures” was amended by the Consolidated Appropriations Act to be a 26% credit for qualifying property expenditures in 2021 and 2022, with a reduction of the credit to 22% for qualifying property expenditures in 2023 and no credit for expenditures after 2023. The IRA provides that for qualified property expenditures after 2019 and before 2022, the credit is 26%. For qualified property expenditures after 2021 and before 2033, the credit is 30%. In addition, “Qualified Biomass Fuel Property” only qualifies for the credit before 2023. For property expenditures after 2022 “Qualified Battery Storage Technology Expenditures” replace “Qualified Biomass Fuel Property Expenditures” as property qualifying for the credit. Note! This credit for the above qualified energy property applies to expenditures by individuals for the above qualified energy property installed in a dwelling located in the United States and used as a residence by the taxpayer.
HIGHLIGHTS OF INDIVIDUAL PROVISIONS THAT EXPIRED AFTER 2021
Increased Child Tax Credit From $2,000 To $3,000 For Children Age 6 Through 17 And $3,600 For Children Under Age 6. Beginning in 2022, the child tax credit reverts to $2,000 for a qualifying child and $500 for dependents other than qualifying children. The total credits are reduced by $50 for each $1,000 of modified adjusted gross income over: $400,000 for joint filers, and $200,000 for all others. In addition, the credit is no longer fully refundable. Planning Alert! If you are able to take the child credit in 2022, make sure you take this into consideration when estimating your 2022 tax liability.
Refundable And Enhanced Child And Dependent Care Credit. Beginning in 2022, the maximum expenses eligible for the child and dependent care credit revert to $3,000 for one qualifying individual and $6,000 for two or more qualifying individuals. In addition, taxpayers with adjusted gross income over $43,000 will receive a maximum 20% credit of $600 for one qualifying individual and $1,200 for two or more qualifying individuals. Also, the credit is no longer refundable. Note! The advance payment of projected child tax credits expired on December 31, 2021.
Deduction For Charitable Contributions In 2021 For Individuals Who Do Not Itemize. For 2021, the Consolidated Appropriations Act provided an additional standard deduction for cash charitable contributions by individuals who did not itemize. The maximum deduction was $300 for singles and for married individuals filing separately and $600 for married individuals filing joint returns. This deduction expired for taxable years beginning after 2021.
Increased Itemized Deduction For Charitable Contributions. The 100% of AGI limitation for cash charitable contributions by individuals who itemized deductions expired after 2021.
FINAL COMMENTS
Please contact us if you are interested in a tax topic that we did not discuss. Tax law is constantly changing due to new legislation, cases, regulations, and IRS rulings. Our Firm closely monitors these changes. In addition, please call us before implementing any planning ideas discussed in this letter, or if you need additional information. Note! The information contained in this material should not be relied upon without an independent, professional analysis of how any of the items discussed may apply to a specific situation.
Disclaimer: Any tax advice contained in the body of this material was not intended or written to be used, and cannot be used, by the recipient for the purpose of promoting, marketing, or recommending to another party any transaction or matter addressed herein. The preceding information is intended as a general discussion of the subject addressed and is not intended as a formal tax opinion. The recipient should not rely on any information contained herein without performing his or her own research verifying the conclusions reached. The conclusions reached should not be relied upon without an independent, professional analysis of the facts and law applicable to the situation.
