Year-end tax planning Strategies
Consider preparing for the upcoming tax season by taking advantage of a few important end-of-year tax strategies.
Take action on these tips by December 31 and find out if you can potentially minimize your tax burden in the spring.
- Consider Loss Harvesting– Maximum deductible net capital loss remains $3,000 per year after offsetting capital gains.
- Be Wary of Wash Sales– When repurchasing the same stock within 30 days of sale across all of your holding’s losses are limited.
- Recognize Capital Gains– Look at unrealized gains before year-end to capture the appreciation in a potentially lower tax year.
- Be Aware of the Preferred Long Term Capital Gain Tax Rates of 0%, 15% and 20%– You can pay lower, preferred tax rates at certain income levels.
- Net Investment Income Tax (NIIT) Remains– At this time, the 3.8% NIIT is here to stay for taxpayers above the AGI threshold.
- Opportunity Zone Investments – While the basis adjustment is no longer available for new investments, Qualified Opportunity Fund investments can still provide current tax deferral of gains and exclusion of future appreciation if holding periods are met.
For Self-Employed/Small Business Owners
- Defer (Until 2023) or Accept (in 2022) Bonuses– Accelerate or reduce taxable income to maximize tax efficiency.
- Maximize Retirement Contributions–
- Review your limitations before year-end.
- Establish and anticipate how to fund self-employed retirement plans.
- Maximize Flexible and Dependent Care Spending Accounts for 2023
- Maximize Health Savings Accounts Contributions– If you have a qualified high-deductible health plan.
- Remember to Catch-up Contributions– For those over 50 (retirement) or 55 (FSA/HSA).
- Revisit With holding Elections Before Year-End– Ensure you are sufficiently withheld at the federal and state tax level including other pre-tax elections for 401(k) plans and parking/transportation expenses.
- Monitor Your Self-Employed Income and Plan for Big Ticket Purchases– With 100% bonus depreciation and bigger expense limitations for M&E and capital expenditures, look at your year-end income and factor in QBI deductions as you review future income prospects. Bonus depreciation will start to phase out in 2023 with an 80% deduction in 2023 and less in later years.
For Retirees and Retirement Planning
- Contribute and Maximize Your Deductible and Nondeductible IRAs– Don’t forget about the $1,000 catch-up for those eligible.
- Contribution and Maximize Non-IRA Plans– Don’t forget the 2022 catch-up contributions for 401(k), 403(b), and 457 retirements plans allow a taxpayer an additional contribution amount of up to $6,500 (limited to $3,000 for SIMPLE plans) to be made on top of the annual elective salary deferral limit.
- Take Your RMD– The mandatory requirements are back in 2022 for those over 72 years of age unless already started.
- Consider Qualified Charitable Distributions– With RMDs back and large standard deductions, you can reduce your AGI up to $100K.
- Revisit Inherited IRA Distribution Requirements– While the IRS has provided relief that no excise tax/penalty will be assessed in the 2021 or 2022 taxable year if required minimum distributions were not made for IRA’s inherited (from someone other than surviving spouses or minor children) from a decedent who was already receiving RMD’s, annual RMD’s will be required to be taken in 2023 with a full distribution being required by the end of the 10th calendar year following the decedent’s death.
- Consider Roth Conversions– If you are in a lower tax bracket today than you anticipate in the future, it may be time to convert.
Adjustments and Itemized Deduction Considerations
- The 5% of AGI floor is permanentfor deducting medical expenses. Some over-the-counter medical expenses and menstrual care products are qualified medical expenses for FSAs, HSAs, and medical deductions.
- The $10,000 SALT cap remains, but there are workarounds with PTETs.
- Above the line $300 or $600 charitable deductions are no longer available in 2022
- Be aware of AGI limitationson cash contributions in 2022 – 60% of AGI for individuals and 30% AGI limitation for capital gain property
- Contribute to donor-advised funds– defer the donation decision to a particular organization while receiving benefit for the donation today (Great for appreciated securities)
- Don’t forget about qualified charitable distributions (QCDs) in 2022
- Disaster Loss– These must occur in a federally-declared disaster area, so review the outstanding insurance claims to enable a deduction.
- Bunch Your Deductions– Apply bunching strategy on medical, charitable, and mortgage expenses in one year or the other, especially if you are close to the itemizing threshold.
- Itemize on Federal to Receive State Benefit– Often itemizing at the federal level produces a similar benefit on your state filing.
- Receive State Benefit for Miscellaneous Itemized Deductions Subject to 2% Floor– While miscellaneous itemized deductions subject to 2% floor are still disallowed at the federal level, few states still permit the deductions when itemizing.
Gift, Estates and the Family Legacy
- Make All Annual Exclusion Gifts– $16,000 per donee annual exclusion gifts ($17,000 per donee in 2023)
- Superfund the 529 Plan– Up to $80,000 per donee.
- Bonus– These plans may provide a state level tax deduction depending on account owner and state rules
- Prepay Tuition and Medical Expenses– These remove assets from your estate and are not taxable gifts and do not reduce the annual exclusion limits.
SALT Deduction Limitation Workaround
- Several states have passed legislation to circumvent the $10,000 state and local tax (SALT) deduction limitation (29 states in total including NJ and NY). In addition, New York City is allowing eligible entities to circumvent the SALT deduction limitation for taxable years beginning on or after January 1, 2022.
- The IRS has confirmed that pass-through entity tax (PTET) elections are effective workarounds the SALT deduction limitation and allow a business to fully deduct state and local taxes from the entity’s taxable income.
State Tax Credits
States offer various tax credits and incentive programs aimed at attracting businesses and stimulating investment and retaining businesses currently operating within their borders.
Determining the best market for your business to incorporate and/or operate is a critical decision — do not overlook the tax credits and incentives that may be available.
Common opportunities from states and/or localities may target:
- Small and mid-size businesses
- Innovative businesses
- Job creation
- Capital investments
- Angel investors
- Specifically targeted industries, such as technology, manufacturing, agriculture, or film
- Geography, such as distressed zones, enterprise zones, or tax-increment finance districts
- Energy credits
General Income Tax Planning
- Postpone income until 2023 and accelerate deductions into 2022.
- Doing so may enable you to claim larger deductions, credits, and other tax breaks for 2022 that are phased out over varying levels of adjusted gross income (AGI).
- Postponing income also is desirable for taxpayers who anticipate being in a lower tax bracket next year due to changed financial circumstances.
- Long-term capital gain from sales of assets held for more than one year is taxed at 0%, 15% or 20%, depending on the taxpayer’s taxable income. If you hold long-term, appreciated capital assets, consider selling enough of them to generate long-term capital gain sheltered by the 0% rate, if applicable.
- The 3.8% net investment income (NII) tax will apply depending on a taxpayer’s modified adjusted gross income (MAGI) and NII for the year. Taxpayers should consider ways to minimize or eliminate (e.g., through deferral) additional NII for the balance of the year, while others should try to see if they can reduce MAGI other than NII.
- The 0.9% additional Medicare tax applies to individuals for whom the sum of their wages received with respect to employment and/or self- employment income exceeds a threshold amount ($250,000 for joint filers, $125,000 for married filing separately, and $200,000 in other cases). Employers must withhold the additional Medicare tax from wages in excess of $200,000, regardless of filing status or other income. Thus, planning opportunities may exist with respect to eliminating this tax by deferring income to a later year.
- Consider asking your employer to increase withholding of state and local taxes (or you can pay estimated tax payments of state and local taxes) before year-end to pull the deduction of those taxes into 2022. But remember that state and local tax deductions are limited to $10,000 per year, so this strategy is not a good one to the extent it causes your 2022 state and local tax payments to exceed $10,000.
- Consider relocating your residency and domicile for the purpose of reducing or eliminating individual state taxation. For example, common states where people move to reduce state taxes are Florida, Texas, Wyoming, and Nevada.
- Consider increasing the amount you set aside for next year in your employer’s health flexible spending account (FSA).
- If you were in a federally declared disaster area, you may want to settle an insurance or damage claim in 2022 to maximize your casualty loss deduction. Confirmation regarding whether the damaged area is categorized by the IRS as a federal casualty loss or qualified disaster loss is important to avoid the 10% AGI limitation. A taxpayer can make an election to deduct a disaster loss in a federally declared disaster area for the year before the year in which the loss occurs is made on an original return or amended return for the preceding year. So, a calendar-year taxpayer who suffers a disaster loss in 2022 has until October 16, 2023 (because October 15 is a Sunday), to file an original or amended 2021 return to deduct the loss for 2021.
Capital Gain Planning
- Should I sell stocks/bonds now or wait for the new year? Capital gain rates are always top of mind, especially for those with substantial unrealized gains or business owners looking to sell their businesses. An increase in capital gain rates, even by a few percentage points, could make the difference between selling now or later.
- With the volatility of the market many have seen a decrease in the value of their stocks. If there is a decision to sell in the 2022 taxable year, individuals should remember that capital losses can be utilized to offset capital gains but then is limited to an additional $3,000 of ordinary income.
- While individuals might be motivated to sell stock during the 2022 taxable year to capture the capital loss and purchase the same stock at a lower cost, the wash-sale rule could apply. The wash-sale rule prohibits selling an investment for a loss and replacing it with the same or a “substantially identical” investment 30 days before or after the sale. If you do have a wash-sale, the loss will be deferred until the replacement investment is sold.
Gift Tax Planning
To give or not to give? The gift and estate tax is once again becoming a hot button issue even with the lifetime exemption currently set at $12.06 million per person (and $12.92 million in 2023). The question is whether any gift given now that uses up the exemption will be grandfathered if there is a future reduction in the exemption amount. The IRS has issued favorable regulations preventing a claw back provision unless the taxpayer retained a significant amount of control after the transfer. If you have not done so already and are comfortable surrendering control of assets to the next generation, it might be a good idea to take advantage of the $12.06 million per individual lifetime exemption in 2022, or $24.12 million for a married couple.
- It may make sense to convert all or part of your eligible retirement accounts (e.g., traditional IRA) to a Roth IRA before year-end. However, such a conversion will increase your AGI for 2022, and possibly reduce tax breaks that are tied to AGI (or MAGI).
- Consider taking versus delaying required minimum distributions (RMDs) from your IRA or 401(k) (or other employer-sponsored retirement plan).
- The IRS announced it will not impose penalties on failures to take specified RMDs for the 2022 taxable year in relation to inherited IRAs.
- Consider bunching charitable deductions in the current year, and making contributions to a donor-advised fund, so you increase your charitable deduction and therefore your itemized deductions fall above the standard deduction. The benefit on a donor-advised fund is that you can deduct the charitable contribution this year and allocate charitable funds from the donor-advised fund to individual charities in later years.
- Make gifts sheltered by the annual gift tax exclusion before the end of the year. The exclusion applies to gifts of up to $16,000 made in 2022 to each of an unlimited number of individuals. The annual exclusion increases to $17,000 in 2023.
- Consider making 2022 charitable donations via qualified charitable distributions from an IRA. When you reach age 70½, the amount of the contribution is neither included in your gross income nor deductible as an itemized deduction and the amount of the qualified charitable distribution reduces the amount of your RMD, which can result in tax savings.
- In 2021, individuals were able to make cash contribution up to 100% of their AGI; in 2022, the percentage is decreased to 60%.
- The ability to take an above-the-line $300 charitable contribution deduction (or an aggregate $600 for joint filers) is not available in 2022.
- Businesses operating as sole proprietorships, partnerships, S corporations, and some trusts and estates may be entitled to a deduction of up to 20% of their qualified business income (QBI). If a qualifying taxpayer’s taxable income exceeds a threshold amount, then the deduction may be limited based on: whether the taxpayer is engaged in a service-type trade or business (SSTB, such as law, accounting, health, or consulting); the amount of W-2 wages paid by the trade or business; and the unadjusted basis of qualified property (such as machinery and equipment) held by the trade or business.
- Taxpayers may be able to achieve significant savings with respect to this deduction by deferring income or accelerating deductions to come under the dollar thresholds (or be subject to a smaller phaseout of the deduction) for 2022. Depending on their business model, taxpayers also may be able to increase the new deduction by increasing W-2 wages before year-end.
- 100% Bonus First-Year Depreciation– Businesses are permitted a deduction for machinery and equipment bought new or used (with some exceptions) if such purchases are placed in service this year. The 100% write-off is permitted without any proration based on the length of time that an asset is in service during the tax year. As a result, the 100% bonus first-year write-off is available even if qualifying assets are in service for only a few days in 2022. In 2023 bonus depreciation will decrease to 80% and continue to decrease 20% in each of the following years until bonus depreciation is no longer allowed in the 2027 taxable year. It is important to consider this significant change when analyzing purchases.
- De Minimis Safe Harbor Election– Also known as the book-tax conformity election, this election is an administrative convenience that allows businesses to deduct small-dollar (i.e., up to $2,500 or $5,000 per invoice) expenditures for the acquisition or production of property that otherwise would have to be capitalized, other than amounts paid for inventory or land.
- Cost Segregation Benefits– Cost segregation is a strategic tax savings tool that allows companies and individuals who have purchased, constructed, expanded, or remodeled any kind of real estate to immediately increase their cash-flow by accelerating their depreciation deductions and deferring their Federal and State income taxes. Cost segregation is recognized as an engineering-based tax study accepted by the IRS. The primary goal of cost segregation is to identify, segregate, and reclassify the various building-related assets from either nonresidential real property (39 years) or residential rental property (27.5 years) to a shorter depreciable tax life (e.g., 3, 5, 7, 15, or 20 years). The reclassification of these assets into the shorter depreciable tax lives allows you to take an immediate deduction (100% bonus depreciation) in 2022. However, remember that the 100% bonus depreciation will be reduced by 20% in each year starting in 2023. Therefore, if you are planning any type of real estate transaction… the time is now to pull the trigger!
Other cost segregation services include:
- Look-back studies to recapture depreciation deductions from prior tax years without amending your tax return
- Repair and maintenance studies
- Section 179D studies relating to energy-efficient commercial buildings
- Purchase price allocation studies
- Income Acceleration– Certain corporations (other than large corporations) that anticipate a small net operating loss (NOL) for 2022 and substantial net income in 2023 may find it worthwhile to accelerate just enough of their 2023 income (or to defer just enough of their 2022 deductions) to create a small amount of net income for 2022. This will permit the corporation to base its 2023 estimated income tax installment payments on the relatively small amount of income shown on its 2022 tax return, rather than having to pay estimated taxes based on 100% of its much larger 2023 taxable income.
- Consider whether to elect into bonus depreciation for the 2022 taxable year
- To reduce 2022 taxable income, consider deferring a debt cancellation event until 2023
- To reduce 2022 taxable income, consider disposing of a passive activity in 2022 if doing so will allow you to deduct suspended passive activity losses
- Research and Development Expenses– Starting in 2022, companies are required to amortize their R&D costs over five years (fifteen years for research conducted outside the U.S.), instead of deducting them immediately each year. This change will require companies to further analyze what costs would fall under §174 for the deduction, which generally is a more expansive list than the types of expenses included in the R&D credit under §41. Tax professionals are closely monitoring Congress to see if a year-end bill can pass that would allow R&D to remain fully deductible.
Modified or New Energy Credits
The IRA extended and modified nine existing federal credits and introduced eight new federal credit opportunities. The IRA also included a direct pay option for not-for-profit entities and governmental agencies for many of the credits. The direct pay option effectively treats the credit as an amount paid to the federal government, that will ultimately be refunded to the entity even if there is no federal tax liability. Also new is the ability of for-profit entities to transfer their credits for cash without having to recognize taxable income.
Some of the credit highlights include:
- Qualified Commercial Clean Vehicles (New): A credit can be claimed for clean vehicle purchases between 2023 and 2032 for an amount not exceeding $7,500 per vehicle (with a gross vehicle less than 14,000 pounds) or $40,000 (for all other vehicles).
- Alternative Fuel Vehicle Refueling Property/Charing Stations (Modified): A credit can be claimed up to 30% of the cost basis for qualified clean-fuel vehicle refueling property. The maximum credit increased from $30,000 to $100,000 and is now applied on a per-property basis under the modified law (as opposed to per project).
- Contractor Energy Efficient Home Credit (Modified): The maximum credit allowable to contractors for the construction of new energy-efficient homes was increased from $2,000 to $5,000. In addition, the law was modified to allow a credit for the construction of multifamily new construction, with a maximum credit of $5,000 provided.
- Energy Tax Credit (Modified): The credit was extended to energy projects that begin construction before January 1, 2025, and the list of energy projects that qualify was expanded. Solar energy projects, qualified small wind energy projects, and qualified fuel cell properties are still viable, but energy projects were also expanded to include energy storage technology, qualified biogas property, and microgrid controllers. In addition, the credit obtainable can be as high as 50% of the cost basis if the prevailing wage and apprenticeship, domestic content, and energy community requirements are met.