2022 Year End Tax Planning for Businesses and Individuals
As another year ends, we still have uncertainty whether a tax package will be included in legislation to extend expiring tax credits, delay or remove the change to the treatment of research and development expenses or if the child credit will be enhanced again. We have been watching the actions of Congress and following the elections. Since we now know that we have a split Congress we are not expecting any major tax packages to be passed while they are focusing on the December 16th deadline for government funding.
Year-end tax planning is always important, even when we do not have all the legislative answers and certainty. This advisor includes items that you should consider as it relates to your taxes and year-end planning.
Each year has its own opportunities and challenges, the end of 2022 is no different. The best way to start is by identifying any changes in your personal situation that would affect your taxes this year and that you expect to occur in the future.
- For 2022, the maximum deferral is $20,500 with an additional catch-up contribution of $6,500 for those over 50 years old as of December 31, 2022.
- For 2023, the maximum deferral is increased to $22,500 and the additional catch-up contribution increases to $7,500.
- postponing income into 2023;
- increasing itemized deductions, such as charitable contributions; or
- increasing retirement plan contributions.
- Health Savings Accounts (HSA). If you become eligible on or before December 2022 to make HSA contributions, you can make a full year’s worth of deductible HSA contributions for 2022.
- Simplified Employee Pension (SEP) Contribution. If you have self-employed income, consider putting money into a SEP. This option is available to you even if you have already deferred the maximum amount into your employer-sponsored 401(k) plan. By contributing money to a SEP, you can typically avoid both current year federal and state taxes on the amount contributed. The maximum SEP contribution for 2022 is $61,000 and it can be funded as late as the due date of your federal tax return, including extensions.
- Student Loan Interest. You may be eligible to take an above-the-line deduction for student loan interest paid up to a maximum of $2,500.
- Self-Employed Health Insurance. Partners and S-Corp shareholders owning more than 2% of the entity stock and self-employed individuals are permitted a deduction for their health insurance for themselves and their dependents. This is different than the itemized deduction since it is above-the-line and not subject to the 10% Adjusted Gross Income limitation.
- Medical Expense Deduction. For 2022, medical expenses are only deductible to the extent that they exceed 10% of your adjusted gross income. Medical expenses include health insurance premiums, Medicare premiums, amounts paid to doctors for medical care, prescriptions, etc. Unless you have a high amount of medical expenses, you most likely will not qualify for this deduction.
- State and Local Tax Deduction. You can deduct up to $10,000 of state and local income taxes and real estate. If you can itemize your deductions and have not reached the $10K limit, you may want to consider paying your real estate taxes in December 2022 as opposed to January 2022. If you have already met the limit, then there is no benefit to pre-paying these taxes.
- Mortgage Interest Deduction. Interest you pay on your home is typically deductible to the extent that the average mortgage balance does not exceed $750,000. For mortgages placed in service prior to December 15, 2017, the limit is $1,000,000. Home equity loan interest is only deductible if the loan was used to buy, build or improve the home. The old rule allowing a deduction for the first $100,000 of home equity interest was eliminated. Also, don’t overlook mortgage points paid upon purchase or refinancing as these may be deductible as well.
- Charitable Contribution Deduction. Consider making charitable contributions before year-end either in cash or non-cash such as highly appreciated stocks. If you donate highly appreciated stock, you can get a donation deduction for the fair market value of the stock and avoid capital gains tax. You can also make contributions at year-end using your credit card, even if the credit card is not paid until 2023. You can write a check to charity and mail it on December 31, 2022 and take a 2022 tax deduction even if the check doesn’t clear your bank until January. Non-cash donations valued over $5,000 (except publicly traded stock) require a written appraisal and a letter from the charity acknowledging the donation to be deductible.
- If you are over age 70 ½, you can make a charitable contribution up to $100,000 directly from your IRA to satisfy the required minimum distribution requirement.
- Beginning in 2022, Ohio offers tax credits to individuals supporting scholarship-granting organizations (SGOs), nonprofit organizations that provide private school scholarships to students in need. This tax-credit scholarship program allows taxpayers to receive a dollar-for-dollar tax credit up to $750 ($1,500 for married filers) for their donations to SGOs. Please reach out to your trusted tax advisor for more information on this new Ohio tuition tax credit.
Estate Tax Planning
Although the business tax rates and the rules are mostly the same as prior years, it is still a good practice to consider your entities structure and verify that you are operating in the best business form. Under the TCJA, corporate tax rates were reduced to 21% and the addition of the Qualified Business Income (QBI) deduction (20% business income deduction) for other taxpayers reduces the tax rate on business income at the individual level, but this deduction is set to sunset after 2025 with other expiring individual provisions.
The TCJA also expanded the small business gross receipts threshold to $27 million for 2022, which allows businesses to elect or remain eligible for various accounting methods, such as utilizing the cash method of accounting and treating inventory as non-incidental materials and supplies or to avoid the uniform capitalization rules for resellers and manufacturers. Your business’ taxable income could be much lower under the cash method of accounting or through various other method changes allowed for small businesses.
- Section 179. Allows you to expense otherwise depreciable property if placed in service in 2022. You may elect to expense up to $1,080,000 of fixed asset costs (with a dollar-for-dollar phase-out for purchases greater than $2,700,000). Additionally, the deduction is limited to business income. Certain real estate improvements can be “Qualified Improvement property” (QIP) and still be eligible for the Sec. 179 deduction.
- Bonus Depreciation. In addition to the Sec. 179 deduction, your business can also deduct first-year bonus depreciation equal to 100% of the cost of most fixed assets with a tax life of 20 years or less. The 100% first-year bonus depreciation will begin to phase out by 20% a year in 2023 through 2026. The CARES act has clarified that QIP is a 15-year property and is eligible for 100% bonus depreciation. QIP includes most non-residential improvements to the interior of a building.
- R&D Credit. Businesses that incur certain research and development (R&D) costs, such as wages, supplies and contract research, are eligible for this general business R&D tax credit.
- Work Opportunity Tax Credit. Businesses that hire individuals from targeted groups (i.e. qualified veterans, long-term unemployment recipients, ex-felons) are eligible for a tax credit equal generally to 40% of up to $6,000 of the individual’s first-year wages paid (per employee).
- Employee Retention Credit. A credit of up to 70% of wages paid by employers forced to close or partially close by government order or experiencing a 20% or greater quarterly reduction in sales. This credit was for the 2020 and 2021 tax year, but qualifying businesses are still able to take advantage of the credit by amending their payroll tax returns.
- Small employer Health Insurance. Up to 50% of employer contributions for employee health insurance may be available for two consecutive years.
These are some of the year-end steps that can be taken to minimize your tax burden. We can help tailor a customized plan that will work best for your tax planning goals. Additional ideas and information may be found in our 2022 Year-End Tax Planning Guide.
Please contact your BMF Advisor if you would like to review any of the items mentioned, schedule a tax planning strategy session or discuss potential implications of the various tax law changes.
John E. Jenkins?>
Melissa G. Dunham?>
CPA, MTax, MBA
About the Authors
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