2022 End of Year Tax Planning Strategies

2022 brought many significant changes including soaring inflation and interest rates, political results from mid-term elections, legislative changes, etc., so we’ve put together a summary of the most impactful tax planning opportunities to consider before year-end.

*The following is meant to be a basic guide for inspiration, always consult with your CPA prior to implementation of these strategies.

INVESTMENTS:

Review investments held outside of tax-deferred IRAs or 401(k)s to determine if there are opportunities to minimize taxes. For example, if you have already realized capital gains before year-end, consider harvesting losses from investments that have decreased in value. Any realized losses can help offset the capital gains and reduce your taxes.  Please also consult your investment advisor prior to doing so.

From a tax perspective, you should generally hold profitable investments for more than one year before selling so you can take advantage of preferential capital gains rates.

For 2022, the long-term capital gain and qualified dividend rates are 0%, 15% and 20%, based on income brackets. Be careful!  Investments held for fewer than 12 months generate short-term capital gains, which are taxed at higher ordinary income rates. Avoid buying back any stock harvested for losses within 30 days before or after the sale. This type of loss is a wash sale and is disallowed which defeats the purpose of harvesting the stock loss.

RETIREMENT PLAN CONTRIBUTIONS:

The contributions and earnings of a traditional employer sponsored retirement plan are generally not subject to tax until you begin receiving distributions from the retirement plan. The maximum contribution to a 401(k) plan is $20,500 in 2022.  Employees aged 50 or older can make an additional catch-up contribution of up to $6,500.

Make sure you take your required minimum distributions from your retirement accounts when necessary! The penalties for non-compliance can be as much as 50% of the amount that should have been withdrawn.

SMALL BUSINESS OWNERS:

Depending on whether you will be in a higher tax bracket in 2023 relative to 2022, you may want to either accelerate/delay income recognition or accelerate/ defer expense recognition in 2022.

Taxpayers under the cash method can defer income by billing and collecting revenue after year-end. Accrual-method taxpayers can delay shipping products or performing services after year-end. Cash-basis taxpayers can prepay certain expenses before year-end.

HOME OFFICE DEDUCTION:

Provided you use at least part of your home regularly and exclusively as your place of business or as a place to meet with customers, clients or patients in the normal course of business, you can deduct a portion of eligible expenses based on the relative square footage of the home.  

Businesses should also take advantage of the bonus depreciation deduction available for qualified assets placed in service before December 31, 2022. Bonus depreciation applies to new and used property used in the business.

RETIREMENT PLANNING:

Set up or contribute to a retirement plan to reduce your taxable income. A 401(k) plan must be set up before December 31, 2022. This year the total employee and employer contributions are limited to $61,000 or the employee’s compensation, whichever is less. If you miss the cutoff date to set up a 401(k) plan in 2022, you may still be able to set up a simplified employee pension plan (SEP). You have until the due date of your return (including extensions) to set up a SEP. In 2022, the employer’s contribution to a SEP is limited to 25% of the employee’s compensation or $61,000, whichever is less.

CHARITABLE DONATIONS:

Donations to qualified charities can be deducted if you itemize your deductions. The charitable contribution limit is to no more than 60% of your AGI for cash contributions. For non-cash contributions to public charities, the charitable contribution limit is 50% of your AGI for donations of certain types of appreciated property and 30% of your AGI for donations of long-term capital gain property. For cash or property donations (including stock donations) of $250 or more, you must obtain an acknowledgment letter from the qualified charity on or before the date you file your 2022 tax return. If your itemized deductions are less than the standard deduction, you will not receive a tax benefit from your charitable contributions. If you anticipate this will be the case, you may want to consider “bunching” future charitable contributions into 2022 to increase your itemized deductions so that you can benefit from the charitable donations. You may also want to consider using a donor-advised fund for this purpose. You will receive a charitable deduction when you contribute to the donor-advised fund, and you will have the flexibility to make actual grant distributions to charities at a later time.  

If you are age 70½ or older, you may also want to consider making a qualified charitable distribution of up to $100,000 annually from your IRA directly to a qualified charity. These distributions can be used to satisfy the required minimum distribution requirement that is imposed on IRAs and are also excluded from taxable income.

MORTGAGE INTEREST:

The current debt limit is $750,000. Consequently, ($375,000 if you filed married filing separate). However, any home purchased after October 13, 1987, and before December 15, 2017, is still eligible for the original $1 million limit (or $500,000 each, if married filing separately). Interest on debt incurred prior to December 15, 2017, but refinanced later is deductible under the original mortgage limitation to the extent the new debt does not exceed the original debt outstanding at the time of the refinance. The interest on a home equity loan is generally not deductible unless the proceeds were used to buy, build, or substantially improve a home and the debt is secured by the home.

MEDICAL EXPENSES:

The deduction for medical expenses can be deducted to the extent the expenses exceed 7.5% of AGI. Eligible expenses include health insurance premiums, long-term care insurance premiums (subject to limitations), medical and dental services, prescription drugs, certain over-the-counter drugs, and the cost of equipment in or improvements to a home to accommodate a disability (to the extent they do not increase the value of a home). Any reimbursed medical expenses, such as those reimbursed by your insurance or employer, cannot be deducted. Medical expenses paid from a flexible spending account or health savings account are also not deductible.

HEALTH SAVINGS ACCOUNT (HSA):

Not only are your contributions to an HSA tax-deductible, but the unused contributions and investment income also grow tax-free. Withdrawals are also tax-free for qualified medical expenses, and penalty-free for any purpose after age 65. Moreover, there is no “use it or lose it” provision and you get to keep your HSA if you leave your job or change your health plan. For 2022, you can contribute up to $3,650 for individuals and $7,300 for families, while individuals aged 55 or older can save an additional $1,000 per year in catch-up contributions to an HSA. These contributions can be made until April 18, 2023, and count toward the 2022 deduction.

CHILD TAX CREDITS:

In 2022, the credit amount reverted to $2,000 per child aged 16 and younger, and the tax credit is only refundable up to $1,500 per child if the parent had earned income of at least $2,500 and the credit hasn’t fully phased out. For single filers and filers filing as married filing joint, the thresholds for modified adjust gross income need to be below $200,000 or $400,000, respectively. The credit is reduced by $50 for every $1,000 that modified adjusted gross income exceeds the thresholds above.

These tips are just the “tip” of the iceberg.  Tax planning should be a part of your strategy year around, don’t wait until December each year to plan!