Dear Clients:
As the year draws to a close, it’s important that we think about a few year-end strategies that might help lower your taxable income for 2022.
The most significant tax law changes during the year took place in August when the 2022 Inflation Reduction Act (2022 IRA) was signed into law. While the new law did not change tax rates significantly, it does extend some expiring business tax credits while also introducing some new tax credits that may benefit some. It also provided a hefty increase in IRS funding to bolster taxpayer services and enforcement of the tax code.
The following are a few considerations you may want to put into place in order to reduce your tax liability for 2022.
Standard Deduction vs Itemized Deductions: The Tax Cuts and Jobs Act of 2017 substantially increased the standard deduction amounts making itemized deductions less attractive for many individuals. For example, in 2021, the standard deduction is $12,950 for singles and $25,900 for married filing jointly. If the total itemized deductions for 2022 will be close to your standard deduction amount, you may want to consider alternating between bunching itemized deductions in 2022 and taking the standard deduction in 2023 (or vise versa) and possibly provide a net tax-benefit over the 2-year period. Charitable contributions provide an excellent opportunity to do this, however, medical, mortgage interest also may provide some options.
Charitable Contributions: As in prior years, you can reap a larger tax benefit by donating appreciated assets, such as stock, to a charity. Generally, the fair market value of the stock or other asset will be the charitable value of your donation.
Finally, if you have an individual retirement account (IRA) and are at least 70-1/2 years old, you are eligible to make a charitable contribution directly from your IRA. This is more advantageous than taking a distribution and subsequently donating to the charity that may or may not be deductible as an itemized deduction. By making the donation directly from your IRA to a charity, you eliminate having the IRA distribution included in your income. This in turn reduces your adjusted gross income. And, because various tax related items, such as the medical expense deduction or the taxability of social security income or the 3.8% net investment income tax, are all calculated based on your AGI, a reduced AGI can potentially increase your medical expense deduction, reduce the tax on social security, and reduce any net investment income tax.
Expenses Incurred While Working from Home: Although more people are working from home these days, related expenses are not deductible if you are an employee. However, if you are self-employed and worked from home during the year, tax deductions are still available.
Mortgage Interest Deduction: If you sold your principal residence during the year and acquired a new personal residence, the deduction for any interest on your acquisition indebtedness or mortgage could be limited. The interest deduction on mortgages of more than $750,000 obtained after December 14, 2017, is limited to the portion of the interest allocable to $750,000. If you have a mortgage on a principal residence acquired before December 15, 2017, the mortgage interest limitation applies to mortgages of $1,000,000 or less.
Interest on Home Equity Indebtedness: You can deduct interest paid on a home equity loan only if the loan was used to buy, build, or substantially improve your home.
Discharge of Qualified Principal Residence Indebtedness: If you had any qualified principal residence debt which was discharged in 2022, it is not includible in gross income.
Qualified Business Income Passthrough Tax Break: Under the qualified business income tax deduction, a 20% deduction is allowed for qualified business income from sole proprietorships, S corporations, Partnerships and LLCs taxed as partnerships. If you qualify for the deduction, which is available to both itemizer and nonitemizers, it is taken on your individual income tax return as a reduction of taxable income. This is a complicated computation and more favorable for those with a taxable income of $340,100 or below for Joint returns and $170,050 for other returns.
Child Tax Credit: The enhanced child tax credit (CTC) that was available last year was not renewed. As such, for 2022, for each child under 17, a CTC of up to $2,000 credit is available, depending on your modified adjusted income. In addition, a $500 nonrefundable credit is available for qualifying dependents other than children. The credit starts phasing out once the adjusted gross income reaches $400,000 for married filing jointly ($200,000 for single or Head of Household) and completely phases out at $440,000 and $240,000 respectively.
Dependent Care Credit: This credit is available to those individuals who have incurred day care expenses for a child or another dependent so that they can work. Childcare expenses for children under 13 years of age. The tax credit is also available for the amount paid for the care of a spouse or a dependent of any age that is physically or mentally incapable of self-care. The credit varies from 35% to 20% depending on the income level of the taxpayer and the amount of the expenses incurred.
Clean Energy Credits: For 2022, the clean energy tax credits available include (1) residential energy property credits, and (2) vehicle-related credits (the qualified plug-in electric drive motor vehicle credit and the alternative fuel refueling property credit). These credits were significantly expanded by the Inflation Reduction Act, generally beginning after December 31, 2022.
Retirement Planning: Investing the maximum amount allowable in a qualified retirement plan will yield a large tax benefit. If your employer has a 401(k) plan and you are under 50, you can defer up to $20,500 of income into the plan in 2022. Catch-up contributions of $6,500 are allowed if you are 50 or over. The maximum IRA deductible contribution for 2021 is $6,000 and that amount increases to $7,000 for those 50 and over.
Also, if you are over 72 years old, you are required to take a required minimum distribution (RMD) from your IRAs for 2022.
Gifting: For 2022, you can give up to $16,000 to as many individuals as you like, and no Gift Tax Return is needed. For 2023, that amount has been increased to $17,000. There are no income tax deductions for these gifts, but they will reduce your estate for estate tax purposes.
Impact of Future Legislation: There have been ongoing discussions between Republicans and Democrats about a potential last-minute end-of-year tax deal regarding a reinstatement of the research and development credit, which expired at the end of 2021 and which businesses are anxious to see reinstated, in exchange for an enhanced child tax credit that is similar to the 2021 enhanced tax credit enacted as part of the American Rescue Plan Act of 2021. Because it is unclear what, if any, tax legislation may be passed before the end of the year, we’ll need to base our year-end planning on existing law.
I look forward to seeing you all soon!!! Please let me know if you have questions.
Have a very HAPPY HOLIDAY season!!!