2022 Year End Planning for Individuals

This year has brought an unprecedented volatility in interest rates and the stock market. Inflation has everyone scrambling to manage their family budgets and watch every dollar. Now is the time to make decisions to reduce your tax liability. In this edition of “Tammy’s Tax Tip’s”, we give you several year-end tax strategies which can help ease your tax burden for 2022.

To combat inflation, Congress passed the Inflation Reduction Act of 2022. This changed a wide range of tax laws including some additional tax incentives for you to consider. There are also several tax provisions that have expired or will soon expire. We continue to closely monitor any potential extensions or changes in tax legislation and will update you accordingly.

We’re here to help explain tax planning opportunities. Please contact us at your earliest convenience to discuss your situation so we can develop a customized plan. In the meantime, here’s a look at some issues impacting individuals to consider as we approach year-end.

Tammy’s Tax Tips for Individuals

2022 Federal Income Tax Rate Brackets

• 2022 Updates:Several adjustments have been made for high inflation in 2022, and more significant adjustments are predicted in 2023.
• Standard Deduction: $25,900 for married couples filing jointly, $12,950 for single filers, and $19,400 for Head of Household status.

• • Social Security: In January 2023, the maximum amount of earnings subject to Social Security tax will increase from $147,000 to $160,200. Additionally, Social Security recipients will have an 8.7% Cost of Living Adjustment (COLA), this will provide a significant increase in Social Security benefits.

• Credits for Dependents: 2021 brought numerous tax benefits for those with dependents, which were only applicable for one year. In 2022, the Child Tax Credit and Dependent Care Tax Credit will return to their pre-2021 form.
  • Child Tax Credit (CTC): The CTC will revert to $2,000 per child ages 16 and younger (in 2021, the credit was $3,600 for children ages 5 and younger and $3,000 for children ages 6-17). Additionally, the CTC will not be refundable in 2022 and there have been no advance payments of the credit throughout the year.
  • Child and Dependent Care Tax Credit: In 2022, the Dependent Care Credit only applies to $3,000 of qualified childcare expenses for one child, or $6,000 for two or more children. The maximum percentage of qualified expenses allowable for the credit has dropped from 50% to 35%, which means the maximum credit is $1,050 for one child and $2,100 for more than one child. Families earning under $15,000 per year are eligible to receive the full credit, as compared to $125,000 in 2021. The credit starts to phase out for families earning more than $15,000 per year.

• Charitable Contributions:
  • For those who itemize, consider making additional charitable contributions prior to December 31^st to reduce your tax liability. Always keep records of your contributions and keep in mind that the cash contribution limit of 60% of your Adjusted Gross Income is back in place for 2022.
  • Consider donating appreciated assets (stocks) that have been held for more than one year, rather than cash.
  • A donor advised fund (DAF) is appealing to many as it allows for a tax-deductible gift in the current year and the ability to dole out those funds to charities over multiple years.
  • For those taking the standard deduction, the $300 (or $600 married filing jointly) above-the-line charitable contribution deduction is no longer available in 2022.
  • Note that it’s important to have adequate documentation of all donations, including a letter from the charity for donations of $250 or more.

• If you itemize, Accelerate Deductible Payments:
  • Mortgage Interest: Pay your January 2023 mortgage payment prior to December 31^st and deduct an extra month of mortgage interest in 2022
  • Real Estate Taxes: Pay real estate taxes due in 2023 before December 31^st. Note that the amount of state and local taxes that you can deduct per year is limited to $10,000.

• Long-Term Care Insurance and Services: Premiums an individual pays on a qualified long-term care insurance policy are deductible as a medical expense.
  • The maximum deduction amount is determined by an individual’s age.
• The following table sets forth the deductible limits for 2022 and the estimated deductible limits for 2023 (the limitations are per person, not per return):

• Required Minimum Distributions (RMDs): The SECURE Act changes the age you are required to take RMDs from age 70 ½ to age 72 for individuals born on or after July 1, 1949.
  • Additionally, retirees will notice a slight reduction in their RMD amount in 2022 due to an adjustment for increase in life expectancy.
  • As in prior years, always be sure to take your RMD by the close of the year. If you do not, there is an additional tax of 50% of the amount that should have been withdrawn from your retirement account
  • Consider donating directly to a Qualified Charitable Distribution (QCDs) from your IRA up to $100,000, which counts toward your RMD amount and will reduce your taxable income. 

• Your Investments:
  • Delay closing capital gain transactions until after year end or structuring 2022 transactions as installment sales so that gain is deferred past 2022.
  • Given the performance of the stock market in 2022, you may have incurred capital losses. Capital losses reduce income from capital gains dollar-for-dollar. This may be an opportunity to sell appreciated assets that you no longer wish to hold.
  • Additionally, capital losses in excess of capital gains can reduce ordinary income by up to $3,000 per year.
  • Always consider relevant details such as holding periods of securities before making investment decisions.

• Retirement Savings: We recommend you review your retirement plans at least annually. A pre-tax retirement account is an excellent way to lower your tax liability in the current year while saving for your future. A Roth IRA does not reduce your taxable income in the current year, but instead provides future tax benefits. Both are subject to annual contribution limits and must be funded by April 15, 2023.
  • Employees can defer up to $20,500 of income in a 401(k), 403(b) or 457 plan ($19,500 in 2021). Those over 50 are eligible to contribute an additional $6,500.
  • SIMPLE IRA contributions are limited to $14,000, plus an extra $3,000 for people 50 years old and over.
  • Traditional IRA and Roth IRA limits are still $6,000 plus an extra $1,000 for individuals 50 year old and over. The income ceilings on Roth IRAs have increased to $214,000 for couples and $144,000 for singles.
  • If you are in a lower tax bracket due to lower-than-usual income, you might consider making a Roth conversion from a traditional IRA and paying the taxes in 2022.

• Digital assets and virtual currency:
  • Digital assets are defined under the U.S. income tax rules as any digital representation of value that may function as a medium of exchange, a unit of account and/or a store of value.
  • Digital assets may include virtual currencies such as Bitcoin and Ether, Stablecoins such as Tether and USD Coin (USDC) and non-fungible tokens (NFTs).
  • The sale or exchange of virtual currencies, the use of such currencies to pay for goods or services or holding such currencies as an investment, generally have tax impacts –– and the IRS continues to increase its scrutiny in this area. We can help you understand any tax and investment consequences.
• Energy tax credits: From electric vehicles to solar panels, “going green” continues to provide tax incentives. The Inflation Reduction Act of 2022 included new and newly expanded tax credits for solar panels, electric vehicles and energy-efficient home improvements. The rules are complex, and some elements of the law are not in effect until 2023, so careful research and planning now can be beneficial.
• Estate and Gift Taxes:
  • For gifts made in 2022, the gift tax annual exclusion is $16,000 and for 2023 is $17,000.
  • For 2022, the unified estate and gift tax exemption and generation-skipping transfer tax exemption is $12,060,000 per person. For 2023, the unified estate and gift tax exemption and generation-skipping transfer tax exemption is $12,920,000.
  • All outright gifts to a spouse who is a U.S. citizen are free of federal gift tax. However, for 2022 and 2023, only the first $164,000 and $175,000, respectively, of gifts to a non-U.S. citizen spouse is excluded from the total amount of taxable gifts for the year.
• Net Operating Losses and Excess Business Loss Limitation: Net operating losses (NOLs) generated in 2022 are limited to 80% of taxable income and are not permitted to be carried back.
  • Any unused NOLs are carried forward subject to the 80% taxable income limitation in carryforward years.
  • A non-corporate taxpayer may deduct net business losses of up to $270,000 ($540,000 for joint filers) in 2022. The limitation is $289,000 ($578,000 for joint filers) for 2023.
  • A disallowed excess business loss (EBL) is treated as an NOL carryforward in the subsequent year, subject to the NOL rules. With the passage of the Inflation Reduction Act, the EBL limitation has been extended through the end of 2028.

• Flexible Spending Accounts: If your employer offers a flexible spending account (FSA) that allows you to pay for qualified medical expenses with pre-tax dollars, don’t forget to use it prior to year-end to avoid losing the funds.
• Avoid Underpayment Penalties: Do you anticipate owing additional taxes when you file your 2022 tax return? Consider making an additional estimated tax payment to avoid underpayment penalties. Also, it is not too late to have additional taxes withheld by your employer. Taxes withheld by your employer are considered to be paid throughout the year, which further reduces underpayment penalties. We can help you determine an appropriate amount of tax to pay or have withheld.

Year-end planning equals fewer surprises

Whether it’s working toward a tax-optimized retirement or getting answers to your tax planning questions, we’re here for you. Please contact our office today at 281-406-8984 to set up your year-end review. As always, planning ahead can help you minimize your tax bill and position you for greater success.

Sincerely,

Tammy Mihail, CPA and team