Download a printable PDF here or read the complete update below.
Unlike last year, there isn’t a threat of sweeping legislation that would drastically alter how one’s income will be taxed. Instead, we’ve returned to the seemingly never-ending cycle of whether the government will shut down due to our eye-watering level of debt. Generally, sweeping tax changes aren’t attached to these budget bills, but that doesn’t mean it doesn’t happen. With a deadline looming, and the known realization that government dysfunction may be a factor once the Republicans take control of the House of Representatives, there may be an incentive to get something passed before year-end.
Regardless of what transpires, reviewing your projected tax situation before year-end is best to ensure you’re setting yourself up for success once filing season is upon us.
Strategically Plan the Timing of Additional Income or Deductions in 2022
With Congress set to have split leadership in both chambers, the odds of any tax increase over the next year are low. Therefore, year-end tax planning should assess whether accelerating deductions into 2022 and deferring income into 2023, or if accelerating income into 2022 and deferring deductions into 2023, makes economic sense.
A. LOOK FOR SITUATIONS WHERE GENERATING INCOME IN 2022 WILL RESULT IN NO ADDITIONAL TAX OR WILL BE SUBJECTED TO A LOWER MARGINAL RATE THAN IT WOULD BE IN 2023.
Realize capital gains:
- if you have excess (non-deductible) capital losses;
- if your long-term gains will be subject to the 0% rate;
- if your long-term gains will be taxed at 15% this year and could be subject to the higher 20% rate in 2023.
Realizing passive income where you have blocked passive activity losses.
Realizing investment income where you have blocked investment interest deductions.
Roth IRA conversions: Converting traditional IRAs to Roth IRAs below a marginal rate of 25% is recommended, as we believe rates will go up in future years.
Don’t forget to consider the state income tax implications on any income acceleration into 2022. Let us know if you would like us to update your tax projection if you’re unsure what the economic impact of any income or expense acceleration/deferral.
B. DEVELOP STRATEGIES FOR TAKING ADDITIONAL 2022 DEDUCTIONS OR POSTPONING UNTIL 2023.
Know where additional deductions will produce little or no tax benefit.
- If your childcare expenses are already above the tax credit or salary reduction limits.
- If the passive loss rules already block your rental losses.
- If your losses or deductions will throw you into a 0%, 10%, or 12% tax bracket.
- If you won’t have enough deductions to itemize and instead will use the standard deduction (Single/Married Filing Separate = $12,950; Head of Household = $19,400; Married Filing Jointly = $25,900).
- Consider electing into a state’s State And Local Tax (SALT) workaround if your business qualifies. By doing so, you receive an immediate tax benefit at the federal and state tax level. These elections may not make sense for every taxpayer, so analyze the tax benefit before proceeding.
- Consider the possibility that the state and local tax cap of $10,000 might be repealed. There is still bi-partisan support for this but mainly from coastal states. If you’re not receiving a tax benefit from state tax payments (i.e., income or sales tax, personal property, and real estate taxes) in 2022, consider postponing payment to 2023.
Consider accelerating deductions if they’ll provide a tax benefit.
- If your year-to-date realized gains exceed realized losses, consider realizing additional losses to reduce your overall gain.
- A situation you want to avoid is paying tax on capital gains in 2022, but unrealized losses carryover to 2023. Taking capital losses to offset capital gains can also avoid the surtax on investment income. Discuss with your financial advisor if it makes sense to exit certain loss positions before year-end.
- Think about your charitable giving strategy.
- The charitable contribution limit of 100% of adjusted gross income (AGI), enacted as part of the Consolidated Appropriations Act, has expired, and we have returned to the 60% of AGI limit for cash and non-cash (except long-term capital gain property) gifts to qualified charities.
- Gifts of long-term capital gain property to public charities, including donor-advised funds, are limited to 30% of AGI.
- Cash gifts to private non-operating foundations are limited to 30% of AGI and 20% of AGI for long-term appreciated publicly traded assets.
- It may make more sense to lump two years’ worth of charitable contributions into one year to take advantage of itemizing if you wouldn’t otherwise receive a tax benefit from your charitable contributions in 2023 (due to the inflation-adjusted standard deduction).
C. REVIEW YOUR ESTATE, GIFT, AND GENERATION-SKIPPING TAX PLAN.
Unlike this time last year, the current estate tax exemption (currently $12.06 million per individual with portability; up to an eye-watering $12.92 million in 2023) doesn’t look like something that legislators want to reduce as part of any year-end legislation. With the GOP taking the House, the higher current exemption that expires on December 31, 2025, will likely remain.
Review gifting opportunities:
- The current annual gift tax exclusion for 2022 is $16,000 per donee. The annual gift tax exclusion will increase to $17,000 per donee in 2023.
- Unlimited transfers directly to educational institutions for tuition: These amounts are not considered taxable gifts. If payments are not paid directly to the educational institution, they are considered gifts.
- Unlimited transfers directly to medical care providers for medical expenditures: These amounts are not considered taxable gifts. They are considered gifts if payments are not paid directly to the medical care provider.
- Gifts to 529 plans: These are considered gifts that reduce your annual exclusion ($16,000 maximum per donee in 2022). However, an exception allows for five years of gifts in one year or a maximum of $80,000 in 2022.
D. REVIEW YOUR 2023 MANDATORY RETIREMENT PLAN DISTRIBUTIONS SHORTLY AFTER YEAR-END.
Remember that the newest life expectancy and distribution period tables apply to both owners of retirement accounts (IRA, 401(k), 403(b)), as well as their beneficiaries, to calculate required minimum distributions (RMD). These tables reflect an increase in life expectancies from the 2002 regulations.
Consider the Treasury’s proposed regulations issued this past February regarding the SECURE Act and how they will impact required distributions from inherited accounts. These regulations seemingly contradict the consensus that beneficiaries were not required to withdraw amounts from the account until the tenth year after the account owner’s passing (at which time the account must be liquidated). Instead, the proposed regulations provide that if the account owner dies after their required beginning date, then the designated beneficiaries (who are subject to the 10-Year Rule) must both take RMDs annually and make the required full withdrawal of the account at the end of the tenth year following the year of the owner’s death. While the proposed regulations are effective for designated beneficiaries who died in 2020 or later, the IRS issued Notice 2022-53 stating:
- Beneficiaries who failed to take the required distributions under the SECURE Act will not be required to take missed distributions,
- Beneficiaries who failed to take the required distributions as per the proposed regulations will be penalized for missed distributions, and
- The required distribution rules will begin in the 2023 calendar year when the Treasury intends to issue its final regulations.
Review this impact with your financial advisor. If you manage your own account(s), review with the custodian to ensure you distribute the correct amount.
2022 Year-End Update: Changes Impacting Next Filing Season
A. FORM 1099-K REPORTING RULES HAVE CHANGED.
Taxpayers who have received third-party payments in the tax year 2022 for goods and services that exceeded $600 should receive Form 1099-K, payment card, and third-party network transactions.
Before 2022, Form 1099-K was issued for third-party networks transactions only if both of the following conditions were met:
- the total number of transactions exceeded 200;
- the aggregate amount of transactions exceeded $20,000.
However, the American Rescue Plan Act of 2021 (ARPA) changed those conditions, lowering the reporting threshold for third-party networks that process payments for those doing business.
For the tax year 2022, a single transaction exceeding $600 can require the third-party platform to issue a 1099-K. The net effect of this change is that many more taxpayers will receive 1099-Ks.
B. ELIGIBILITY RULES TO CLAIM A TAX CREDIT FOR CLEAN VEHICLES HAVE CHANGED.
The passing of the Inflation Reduction Act of 2022 has changed the benefits taxpayers may receive from purchasing electric/clean vehicles. Tax credits available under section 30D (EV credit) for buying a new electric vehicle after August 16, 2022 (when the Inflation Reduction Act of 2022 was enacted) are generally available only for qualifying electric vehicles for which final assembly occurred in North America.
The Department of Energy has provided a list of Model Year 2022 and early Model Year 2023 electric vehicles that may meet the final assembly requirement.
2022 Year-End Tax Planning: Routine Follow-ups
A. TAXPAYERS SHOULD MAKE SURE THAT WITHHOLDING AND/OR TAX DEPOSITS ARE ADEQUATE TO AVOID UNDERPAYMENT PENALTIES.
- Review tax estimates to make sure tax deposits (including withholding) are sufficient to avoid underpayment penalties. We recommend updating your estimate before year-end if income has changed materially during the year.
- Holders of mutual funds in non-tax deferred accounts should review year-end capital gain distributions, which could be an atypical year for some shareholders. Distributions occur as early as the week after Thanksgiving until year-end. Each fund will provide distribution information on its website, so do look over this if you’re concerned.
B. MAKE SURE THAT YOU ARE MAKING MAXIMUM USE OF THE FOLLOWING TAX BENEFITS:
- $3,000/year capital loss deduction allowance.
- $25,000 rental loss allowance for owners with active participation in the ownership and management of rental real estate. (Warning: This benefit phases out as Adjusted Gross Income increases from $100,000 to $150,000.)
- Barring any last-minute legislation change, the child tax credit has reverted to its original limit of $2,000 for every dependent under the age of 16.
- The dependent care exclusion has also reverted to the original $5,000 for individuals or married couples filing jointly ($2,500 for married filing separately).
- The Child and Dependent Care Credit returns to a maximum of $2,100 in 2022 instead of $8,000 in 2021.
- Deductible IRA contributions (Maximum $6,000 per individual)
- Individuals over 50 can make an additional “catch-up” contribution of $1,000. Non-working spouses may have deductible IRAs available if Adjusted Gross Income tests are met.
Note: Deduction phase-out ranges are increased annually for individuals with pension coverage. The phase-out point begins for individuals with pension coverage at $68,000 of AGI for single and head-of-household filers and $109,000 of AGI for joint filers with pension coverage. Individuals are completely phased out at AGI levels of $78,000 for single and head-of-household filers and $129,000 for joint filers. The phase-out point for spouses without pension coverage starts at $204,000 AGI when the other spouse has pension coverage and is fully phased out at $214,000 AGI.
- $100,000 per year exclusion of charitable distributions from IRA accounts by individuals aged 70 ½ or older
- Review whether 100% bonus depreciation or IRC section 179 expensing is more beneficial for property used in a trade or business. To qualify for bonus depreciation, the property categorization must meet the MACRS recovery period of 20 years or less.
Note: 100% bonus depreciation ends on December 31, 2022, and the deduction phases out over the next four years – 80% in 2023, 60% in 2024, 40% in 2025, and 20% in 2026. After 2026, the deduction will no longer be available as the benefit will sunset.
- The maximum deduction under Section 179 expensing is $1,080,000, and the phase-out threshold begins at $2,700,000 of asset additions. The expense allowance is completely phased out if $3,780,000 of purchases are made.
- The optional standard mileage reimbursement rate for 2022 is broken up into two parts for 2022:
- 58.5 cents for 1/1/22 through 6/30/22
- 62.5 cents for 7/1/22 through 12/31/22
C. PAY ATTENTION TO FINANCIAL HOUSEKEEPING:
- Shareholders who have advanced money to their incorporated businesses should evidence the transaction with a note and charge an adequate interest rate. Failure to do so could cause the loan to be recharacterized as a capital contribution.
- Loans between family members should be evidenced with a note, and an adequate interest rate should be charged. The interest rate should be at or above the applicable federal rate for the month the loan was made. Avoid any disguised gift tax issue by having a written debt instrument with appropriate interest, a repayment schedule, and an expectation that the amount will be repaid.
- If you are married to a foreign national, ensure your spouse has an ITIN (Individual Tax Identification Number). E-filing is not allowed without one.
- Apply for Social Security numbers for dependents.
- Change Social Security name records for name changes due to marriage or divorce. (Note: Names used on tax returns must agree precisely to the spelling used by the Social Security Administration, including the use of abbreviations and initials.)
- Obtain documentation for charitable contributions. A written acknowledgment must substantiate gifts of $250 or more from the donee organization.
- Obtain appraisals for non-cash contributions exceeding $5,000.
- Get auto usage records compiled. Businesses should ensure that company autos’ personal use value is included in the employee’s W-2.
- Ensure documentation for meal expenses and other deductions is adequate to withstand an IRS audit. With a possible significant increase in IRS funding to enhance audit rates of tax returns, taxpayers may want to focus on ensuring they have documentation to support all deductions and credits on their tax returns. Do not dispose of the year’s appointment book if you intend to rely on it to support business deductions. Entertainment expenses are no longer deductible.
- Get taxpayer ID numbers for 1099 and W-2 recipients (including daycare providers) by having them complete Form W-9.
- Document participation in business activities if you feel this may be an issue applying the passive loss rules (or if you are claiming exemption from the Net Investment Income tax on the sale of partnership interests or S-corporation stock). The general cutoff point for material participation is 500 hours per year. However, to qualify as a Qualified Real Estate Professional, the hour requirement is 750 hours in rental trades or businesses.
- Update your investment tax basis records, especially mutual funds with dividend reinvestment. Also, update basis records for improvements done to real estate.
- If you have received any gifts of investment property during the year, ask the donor for the carryover basis information. Maintain gift letters in your permanent records.
- Get business activities segregated into separate bank accounts for 2023.
- If your deductions will change radically in 2023, adjust your withholding accordingly using Form W-4.
D. REVIEW 2023 BENEFIT PLAN OPTIONS WITH YOUR EMPLOYER:
- 401(k) plan contribution rate and investment choices. (Don’t forget to elect the bonus contributions if you’re 50 or older.) The maximum elective deferral for 2023 has increased to $22,500). The catch-up contribution for individuals 50 years or older is $7,500.
- Non-qualified deferred compensation plan elections.
- Dependent care assistance salary reductions.
- Compensation paid in the form of mass transit passes. (The Tax Cuts and Jobs Act eliminated the deduction for employers but retained the pre-tax benefit for employees.)
- Health savings account contributions.
- Flex spending account contributions
Health insurance coverage with a high deductible policy entitles you to contribute to a Health Savings Account (HSA). Minimum qualifying policy deductibles are $1,500 for single coverage or $3,000 for family coverage. The maximum HSA contribution for 2023 is $3,850 for single coverage or $7,750 for family coverage. Catch-up contributions of $1,000 will be allowed for individuals aged 55 or more. Individuals enrolled in any part of Medicare cannot make HSA contributions.
- Married couples with HSA-eligible family coverage will share one family HSA contribution limit of $7,750 in 2023. If both spouses have eligible self-only coverage, each spouse may contribute up to $3,850 in separate accounts.
- If both spouses with family coverage are age 55 or older, they must have two HSA accounts in separate names if they each want to contribute an additional $1,000 catch-up contribution.
- Suppose only one spouse is 55 or older, but the younger spouse contributes the full family contribution limit to the HSA in their name. In that case, the older spouse must open a separate account to make the additional $1,000 catch-up contribution.
The maximum annual contribution limit for a flex spending account for 2022 was $2,850. The limit increases to $3,050 for 2023. In addition, participants can carry over up to $570 (of 2022 contributions) in unspent contributions if the plan has not adopted the 2 ½ month grace period rule. (This allows 2 ½ months after year-end to spend unused funds.) The $570 carryover will not reduce the current year’s FSA contribution. Caution: Taking advantage of the carryover rule will prevent HSA contributions. The 2023 contribution carryover is indexed for inflation and will be $610.
Action: If you plan on making HSA contributions for 2023, clear out the flex spending account before year-end.
Looking to 2023
We’re excited to merge with Founder’s CPA to expand our capabilities and services.
The name on the door might be different, and there will be some new faces, but beyond that, not much else will change your client experience. Our #1 priority remains client service, and we look forward to continuing this tradition in our new chapter. We’re excited to have you with us on this journey.
The state of the industry.
As mentioned in last year’s letter, the tax compliance process has become more complex. This trend will continue and will place more burden on taxpayers and practitioners. The IRS is years behind, understaffed, and has an aging infrastructure. As a result, the notices, errors, delays in processing, and backlogs continue. Unfortunately, new tax legislation is enacted before guidance on previous legislation is clarified, further complicating the compliance function. We’re hoping that the latest funding the IRS will receive will help them overcome many of these outstanding issues that have lingered for years. We aren’t holding our breath.