With the holidays upon us and the end of the year approaching, WBL CPAs + Advisors are hard at work tax planning for 2022 and beyond for our clients. Have you gotten your stocking stuffers yet? Some quick things to consider:
- Review your brokerage accounts and determine if you would benefit from selling investment assets with unrealized losses. Such losses can offset capital gains, capital gain distributions and up to $3,000 of other income. Watch out for the "wash sale" rules if you plan to re-acquire the assets.
- If your itemized deductions (i.e., mortgage interest, charitable contributions, up to $10k of state taxes, etc.) for 2022 exceed your standard deduction ($12,950 for single, $25,900 for joint filers), consider making year-end charitable contributions to qualified charities. "Bunching" itemized deductions whereby you generate as many deductions as possible in one year is a strategy that could optimize the use of the itemized deduction in one year and standard deduction in another.
- Contributing to charity appreciated stock held for more than a year is a great way to get contribution deductions. Doing so also avoids paying taxes on capital gains. Using Donor Advised Funds might be a good way of accomplishing your charitable goals with appreciated stock (or cash).
- Optimize your contributions to retirement plans (IRAs, profit sharing plans, SEPs, 401ks etc.) if you are in the highest tax brackets. However, if you had an unfortunate year income-wise and otherwise will not be able to benefit from business losses or itemized/standard deductions, consider converting your traditional IRA to a Roth IRA, assuming the resulting income can be offset or taxed at lower rates.
- Don't miss out on the increased IRS mileage rate for 2022 business travel. The IRS increased the rate to 62.5 cents a mile for the last half of 2022 (for travel after 7/1/22).
- For those who are old enough or have inherited IRAs, do not forget to take your required minimum distribution (RMD) from your plan for 2022. The potential penalties for missing these can be significant.
- If you have investments that have generated non-deductible passive losses in the past and you have contemplated exiting from them, doing so before year-end could enable you to deduct previously-suspended loss carryovers.>
- Review your withholding year-to-date to ensure there are no significant penalties for underpayment of estimated taxes. Additional withholding by year-end will be treated as if it was made throughout the year. Also consider making a Q4 estimated tax payment, generally due by January 15.
- If you are contemplating purchasing business equipment, doing so before year-end can provide immediate tax deductions under either IRC Section 179 or the 100% bonus depreciation rules. Note that starting in 2023, the amount of bonus depreciation will be reduced to 80% of cost as part of the plan to sunset the benefit 20% a year until it is totally phased out in 2027.
- Business owners on the cash basis should also look at paying payables and certain expenses before year-end to generate 2022 deductions, if doing so will reduce your overall tax burden. As always, the tax posture of two years, 2022 and 2023 in this case, should be examined/projected to determine if such deductions would be better in one year versus the other.
- If you own a passthrough entity, such as an S corporation or partnership, consider whether to make a passthrough entity tax election and pay state taxes at the entity level. Doing so may optimize your tax deduction for state taxes. See our blog regarding the strategy to work around the $10,000 cap on state and local tax deductions.
- Consider the impact of new research and development (R&D) capitalization rules. Effective for 2022, R&D expenses are required to be capitalized and amortized over five years rather than deducted as incurred. This provision would also apply to software development costs. There has been a lot of talk in Congress about restoring the deduction retroactively, but nothing has passed yet.
- Businesses should take advantage of the 100% deductibility of valid business meals provided by a restaurant. In 2023, the deduction is reduced back to the 50% limitation in effect prior to 2021.
- While the Inflation Reduction Act, passed in August of 2022, did not produce significant tax saving opportunities for the average taxpayer, its provisions should still be reviewed. For example, certain electric and plug-in hybrid vehicles are eligible for the Clean Vehicle Credit of up to $7,500, but only for those with adjusted gross incomes under $150,000 ($300,000 for joint filers). Also, up to $1,200 of credits for certain energy-saving home improvements is now available.
- The impact of inflation makes deferral of income a likely winner, from a tax standpoint, for many individuals. Tax brackets and other provisions that are indexed for inflation will be adjusted for 2023, resulting in slightly lower taxes for such deferred income.>
- While income tax planning is important, don't forget to evaluate year-end estate planning moves. For those with large taxable estates, consider making gifts of up to $16,000 per recipient before year-end. This annual exclusion will rise to $17,000 in 2023. The cumulative lifetime exclusion amount of $12.06 million for 2022 will rise to $12.92 million for 2023.
- While reviewing your health insurance options for 2023, consider the tax benefits of a Health Savings Account (HSA). Most important, you must have a "high-deductible health plan" to have an HSA. Contributions are deductible and earnings build up tax-free as long as withdrawals are used to pay medical expenses.
- As far as expected new or updated tax laws in 2023, gridlock in Washington is likely to prevail which could minimize major changes. Republicans will control the House while Democrats control the Senate and the White House. Major proposals by the Biden administration to increase taxes on wealthy individuals and big corporations will have a tough road to passage and are, therefore, unlikely to happen.
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As always, WBL CPAs + Advisors will continue to monitor tax legislation, IRS rulings and court decisions for changes that may impact you. If you are interested in discussing any of the suggestions in this article or any tax strategy questions you have, please contact any member of our Tax Planning and Compliance Services team. In the meantime, please accept our sincere wish for an outstanding holiday season and a happy New Year!