Although we entered 2022 with a lot of uncertainty about potential income tax law changes, very few of the proposals were enacted.
In August, President Biden signed into law the Inflation Reduction Act. The Inflation Reduction Act focused on ramping up climate and healthcare related spending and left out virtually all measures that would have directly raised tax rates on individual taxpayers. As any potential future legislation continues to evolve, we will let you know.
In the meantime, as the year draws to a close, now is the time to take a closer look at your current tax strategies to make sure they are still meeting your needs and take any last-minute steps that could save you money.
The traditional year-end tax planning strategies, such as accelerating income into the current year or deferring income into the following year and accelerating expenses into the current year or deferring expenses into the following year still make sense, even in 2022. The proper strategy depends on whether or not you anticipate a significant change in income or expenses next year.
Depending on your projected income for 2022, you may need to revise your withholdings or increase/decrease your 4th quarter estimated tax payments for 2022 to take these changes into consideration. The 2022 federal and Wisconsin 4th quarter estimated tax payments are due on January 17, 2023, this year.
The due dates are as follows for some common tax returns:
- 2022 Individual return due date is April 18, 2023
- 2022 FBAR Form FinCEN 114 return due date is April 18, 2023. Filers who fail to file their 2022 calendar year FBAR by April 18, 2023, have an automatic extension up to October 16, 2023.
While the following are some of the actions you should consider, the focus should not be entirely on tax savings. These strategies should be adopted only if they make sense in the context of your total financial picture.
Accelerating Income into 2022
Depending on your projected income and how you have been impacted by the pandemic, it may make sense to accelerate income into the 2022 tax year. Besides harvesting gains from your investment portfolio, other options for accelerating income include:
- If you own a traditional IRA or a SEP IRA, converting it into a Roth IRA and recognizing the conversion income this year.
- Taking IRA distributions (greater than RMDs) this year rather than next year.
- Selling stocks or other assets that create taxable gains this year.
- If you are self-employed with receivables on hand, trying to get clients or customers to pay before year end.
Deferring Income into 2023
There are also scenarios in which it might make sense to defer income into the 2023 tax year; for example, if you think that your income will decrease substantially next year. Some options for deferring income include:
- If you are due a year-end bonus, asking your employer to pay the bonus in January 2023 or later.
- If you are considering selling assets that will generate a gain, postponing the sale until 2023.
- Delaying the sale of any stock options you may have.
- If you are selling property, considering an installment sale or perhaps closing next year.
- Consider parking investments in deferred annuities.
- Establishing an IRA, if you have compensation and are within certain income requirements.
Accelerating Deductions into 2022
If you expect your income to decrease next year, you should accelerate what deductions you can into the current year. Some options for accelerating deductions include:
- Consider making your January mortgage payment in December.
- Since medical expenses are deductible only to the extent they exceed 7.5% of your adjusted gross income (AGI), if you have large medical bills not covered by insurance, bunching them into one year may help overcome this threshold.
- Making large charitable donations in 2022, rather than 2023. This might include using a donor-advised fund (DAF). A DAF allows you to claim a tax deduction for current year contributions even though these funds may not be distributed to your chosen charities until future years.
- Selling some or all your loss stocks, which might be used in the current year.
- If you qualify for a health savings account (HSA), consider setting one up and making the maximum contribution allowable.
- If your employer has a 401(k) plan, consider putting the maximum salary allowed into it before year-end.
Be aware of the current standard deduction amounts for 2022 when considering these options, which are $25,900 Married Filing Joint (MFJ), $19,400 Head of Household (HOH) and $12,950 for Single and Married Filing Separately (Single/MFS). Additional amounts for elderly/blind are retained. A taxpayer can take the higher of their standard deduction or itemized deductions (i.e., state and local taxes, mortgage interest, charitable contributions). Due to these increased standard deduction amounts many taxpayers might no longer itemize in 2022.
Certain life events can also affect your tax situation. If you’ve gotten married or divorced, had a birth or death in the family, adopted a child, lost or changed jobs, or retired during the year, we need to discuss the tax implications of these events.
Inflation Reduction Act and Other considerations
- Nonbusiness Energy Property Credit – Now you may take the credit for energy-efficient property placed in service before January 1, 2033. The credit was increased to an amount equal to 30% of the sum of (a) the amount paid or incurred by you for qualified energy efficiency improvements installed during that year, and (b) the amount of the residential energy property expenditures paid or incurred by you during that year. The credit is further increased for amounts spent for a home energy audit. The amount of the increase due to a home energy audit can’t exceed $150. Lastly, changes also repeal the lifetime credit limitation, and instead limits the allowable credit to $1,200 per taxpayer per year. In addition, there are annual limits of $600 for credits with respect to residential energy property expenditures, windows, and skylights, and $250 for any exterior door ($500 total for all exterior doors). Notwithstanding these limitations, a $2,000 annual limit applies with respect to amounts paid or incurred for specified heat pumps, heat pump water heaters, and biomass stoves and boilers.
- Residential Clean Energy Credit – this credit for solar electric, solar hot water, fuel cell, small wind energy, geothermal heat pump, and biomass fuel property installed in homes has been extended through 2034 and also makes the credit available for qualified battery storage technology expenditures.
- New Clean Vehicle Credit (previously New Qualified Plug-In Electric Drive Motor Vehicle credit) – Credit is renamed and new legislation added a new requirement for final assembly in North America that took effect on August 17, 2022, with additional requirements taking place beginning January 1, 2023. The rules are complicated. They place more emphasis on where the battery components (and critical minerals used in the battery are sourced). The minimum credit amount is $2,500, and the credit may be up to $7,500 based on each vehicle’s traction battery capacity and the gross vehicle weight rating. No credit is allowed if the lesser of your modified adjusted gross income for the year of purchase or the preceding year exceeds $300,000 for a joint return or surviving spouse, $225,000 for a head of household, or $150,000 for others. In addition, no credit is allowed if the manufacturer’s suggested retail price for the vehicle is more than $55,000 ($80,000 for pickups, vans, or SUVs).
- Previously-Owned Clean Vehicles – A qualified buyer who acquires and places in service a previously-owned clean vehicle after 2022 is allowed an income tax credit equal to the lesser of $4,000 or 30% of the vehicle’s sale price. No credit is allowed if the lesser of your modified adjusted gross income for the year of purchase or the preceding year exceeds $150,000 for a joint return or surviving spouse, $112,500 for a head of household, or $75,000 for others. In addition, the maximum price per vehicle is $25,000.
- Required Minimum Distributions (RMDs) are the minimum amount you must annually withdraw from your retirement accounts (e.g., 401(k) IRA, etc.) if you meet certain criteria. For 2022, you must take a distribution if you are age 72 by the end of the year. For those who reached age 72 in the current year, you have until April 1, 2023, to take your first RMD. Planning ahead to determine the tax consequences of RMDs is important, especially for those who are in their first year of RMDs.
- Unemployment Compensation –There is no exclusion from income in 2022. Unemployment compensation is includible in an individual’s gross income and taxed accordingly.
- Section 529 plans may be used to pay student loans. The tax code was modified to allow 529 plans to be used to repay up to $10,000 of student loans (principal and/or interest) for the 529 beneficiary or their sibling.
- However, the portion of student loan interest that is paid for with tax-free 529 plan earnings is not eligible for the student loan interest deduction.
- The law includes an aggregate lifetime limit of $10,000 in qualified student loan repayments per 529 plan beneficiary and $10,000 per each of the beneficiary’s siblings. Siblings may include a brother, sister, stepbrother or stepsister. A 529 plan account owner may change the 529 plan beneficiary at any time without tax consequences.
- State Tax Obligations Related to Teleworking Arrangements – The pandemic has spawned changes in how people work, and more people are permanently working from home (i.e., teleworking). Such remote working arrangements across state lines could potentially have tax implications. Please contact us to discuss this further if you are in this situation or have questions.
- Virtual currency/cryptocurrency. Virtual currency transactions are becoming more common. There are many different types of virtual currencies, such as Bitcoin, Ethereum and Ripple. The sale or exchange of virtual currencies or the use of such currencies to pay for goods and/or services generally has tax consequences, which needs to be reported on your return.
- Charitable Contribution Deductions – For 2022, there is currently no longer an option for individuals who do not itemize their deductions to take a charitable deduction of up to $300 ($600 for joint filers). This opportunity expired as of December 31, 2021, and has not currently been extended for 2022. Additionally, 2022 charitable contribution rules have reverted back to no more than 60% of your AGI for cash contributions. There are many tax planning strategies we can discuss with you in this area.
- Traditional IRA contributions for all. The age restriction on making traditional IRA contributions was removed. Individuals over the age of 70½ who are still working in 2022 are no longer prohibited from contributing to a traditional IRA. However, if you’re over age 70½ and considering making a charitable donation directly from your IRA (known as a Qualified Charitable Distribution or QCD) in the future, making a deductible IRA contribution will affect your ability to exclude future QCDs from your income. Please contact us for further explanations of QCDs and how they can be an effective way to give to charity and reduce your income.
- Convert Traditional IRA(s) into Roth accounts. This may be the perfect time to make that Roth conversion you’ve been thinking about. The current tax rates are still relatively low and could increase soon.
- Take advantage of 0% tax rate on investment income. A potential silver lining to a down year may be the ability to harvest some long-term capital gains at very favorable rates. For 2022, singles can take advantage of the 0% income tax rate on long-term capital gains and qualified dividends from securities held in taxable brokerage firm accounts if their taxable income is $41,675 or less. For heads of household and joint filers, that limit is increased to $55,800 and $83,350, respectively.
- If you have a foreign bank account or assets, there might be reporting requirements and tax forms to file. Noncompliance carries stiff penalties.
- The 2022 Gift Tax annual exclusion was increased to $16,000 per Donee (up from $15,000 in 2021). The 2023 Gift Tax annual exclusion will increase to $17,000 per Donee.
- Review your paycheck tax withholding. It’s important to check your tax withholding, especially if you had major employment or life changes, such as an increase to your income, a change in your marital status, the arrival of a new child or the purchase of a home. Reviewing your tax withholding can help you see if you have the right amount of taxes taken out of your paycheck. If you do not withhold enough taxes, you may owe money when you file your income taxes and face an unexpected bill. On the other hand, if you withhold too much—and you receive a large tax return—you may prefer to adjust your taxes to receive more money in each paycheck.
- Create an IRS Online Account. Now is a good time to create an IRS online account. The account allows you to view your balances, along with prior tax records, payments and more, without the need to speak with the agency. While your 2022 tax paperwork, such as W2s and 1099s, may not be available at this time, creating your account now can save you time when filing during the next tax season, since you will not need to go through the verification process. To get started, see https://www.irs.gov/payments/your-online-account.
As in prior years, it is our intention to send out or upload your 2022 tax organizers the first week of January 2023. We will deliver the organizers to your secure online access portal. You will receive an e-mail notification when the organizer has been uploaded. For the few clients that have requested a paper organizer in addition to the electronic version, these will be mailed in the beginning of January as well.
Please reach out to us at your earliest convenience so we can set up an appointment and estimate your tax liability for the year and discuss any questions you may have. Contact Berndt CPA
Berndt CPA LLC