Unlike 2021, when numerous tax law changes were proposed and almost enacted via the Build Back Better Act, relatively minor changes to the tax law were made in 2022 via passage of the Inflation Reduction Act (Act). Largely due to opposition from Senators Manchin and Sinema, the tax provisions contained in the Act were significantly narrower than President Biden’s original tax proposals, and primarily include a 15 percent tax on certain corporations, a one percent tax on stock repurchases, and an extension of the excess business loss limitation.
With the Republicans now in control of the House of Representatives, it is unlikely that there will be significant tax law changes in 2023. While legislation around retirement plans, digital assets, and tax extenders is possible, there is a low probability of significant tax legislation being enacted in the near future.
Thus, traditional year-end tax planning strategies apply for 2022 and include:
- Projecting the amount of tax due for 2022
- Funding retirement plans
- Making charitable contributions
- Making annual exclusion gifts
- Funding a health savings account
- Tax loss harvesting
- Investing in a Qualified Opportunity Fund
- Determining the impact of the excess business loss limitation
- Withdrawing a Required Minimum Distribution
- Creating an Online Account with the Internal Revenue Service
Project Amount of Tax due for 2022
Now is a good time to prepare a projection of your 2022 income tax liability and determine if your withholding and/or estimated tax payments are sufficient to cover that tax liability. If not, you may want to make (or increase) a fourth quarter estimated tax payment (due January 17, 2023) in order to avoid a large balance due on April 18, 2023, and/or avoid or mitigate a penalty for underpayment of estimated tax.
The TCJA also changed the term “research or experimental expenditures” in Section 174(a) to “specified research or experimental expenditures.” Section 174(b) defines this term as “research or experimental expenditures which are paid or incurred by the taxpayer during such taxable year in connection with the taxpayer's trade or business.”
Fund Retirement Plans
A great way to reduce your 2022 income tax liability is to fully fund the retirement plans in which you are eligible to participate. The elective deferral limit for employees who participate in a 401(k), 403(b), and most 457 plans is $20,500 for 2022 (increasing to $22,500 for 2023). The “catch-up” contribution limit for employees aged 50 and over who participate in a 401(k), 403(b), and most 457 plans is $6,500 for 2022 (increasing to $7,500 for 2023) and, thus, these employees can contribute up to $27,000 to a 401(k), 403(b), or 457 plan for 2022 ($30,000 for 2023). Elective deferrals for 2022 must be made by December 31, 2022.
The limit on annual contributions to a traditional IRA is $6,000 for 2022 ($6,500 for 2023), with an additional $1,000 catch-up contribution limit for individuals aged 50 and over (which does not change for 2023). However, if either you or your spouse participates in a retirement plan at work, an income tax deduction for a contribution to a traditional IRA will be disallowed when your modified adjusted gross income (MAGI) equals or exceeds a specified amount, determined as follows:
- In the case of a single individual who is covered by a workplace retirement plan, $78,000 for 2022 ($83,000 for 2023).
- In the case of a married couple filing a joint return where the spouse making the IRA contribution is covered by an employer retirement plan, $129,000 for 2022 ($136,000 for 2023).
- In the case of a married couple filing a joint return where the spouse making the IRA contribution is not covered by an employer retirement plan but the non-contributing spouse is covered, $214,000 for 2022 ($228,000 for 2023).
- In the case of a married individual that files a separate return and is covered by a workplace retirement plan, $10,000 for 2022 (same for 2023).
The limit on annual contributions to a Roth IRA is also $6,000 for 2022, but you can only make a direct contribution to a Roth IRA if your MAGI is below a certain amount. Specifically:
- For single individuals and heads of household, the MAGI limit is $144,000 for 2022 ($153,000 for 2023).
- For married couples filing jointly, the MAGI limit is $214,000 ($228,000 for 2023).
- For a married individual filing a separate return, the MAGI limit is $10,000 for 2022 (and for 2023).
If you have net earnings from self-employment from an activity conducted as a sole proprietorship or from director fees, you may be able to contribute up to $61,000 to a Simplified Employee Pension (SEP) plan for 2022 ($66,000 for 2023) and claim an income tax deduction for such contribution. A SEP plan may be established and funded as late as the due date (including extensions) of your Form 1040 (i.e., as late as October 15, 2023, for 2022).
Make Charitable Contributions
Making charitable contribution is another great way to reduce your 2022 income tax liability. In most cases, an income tax deduction for cash contributions to a public charity is available in an amount up to 60 percent of your adjusted gross income, and an income tax deduction for non-cash contributions to a public charity is usually available in an amount up to 30 percent of your adjusted gross income. Contributing appreciated property that you have owned for more than one year to a charitable organization provides an extra tax benefit as you receive an income tax deduction for some or all of the value of the property contributed and you avoid tax on the gain inherent in the property contributed.
Also, if you are age 70 ½ or older, you can donate up to $100,000 in 2022 to one or more charities directly from a traditional IRA. You won’t receive an income tax deduction for the donation (called a “qualified charitable distribution”), but you won’t be subject to income tax on the IRA distribution either. Further, if you must take a required minimum distribution (RMD) from your IRA, using some or all of your RMD to make a qualified charitable distribution is a tax-efficient way to handle your RMD if you don’t need the funds.
Make Annual Exclusion Gifts
A tax-efficient way to reduce your estate is to make annual exclusion gifts. You can exclude gifts of up to $16,000 in 2022 ($17,000 in 2023) to as many separate donees as you wish from the gift tax (and potentially from the generation-skipping transfer tax), and the value of these gifts is removed from your estate for estate tax purposes.
Fund a Health Savings Account
A Health Savings Account (HSA) is a tax-advantaged savings account that you can use to pay certain medical expenses. You receive an income tax deduction for funds contributed to an HSA and, as long as the funds are ultimately used to pay for qualified medical expenses, the funds and the earnings on the funds will not be subject to Federal income tax. Unfortunately, HSAs are only available to individuals that are enrolled in a high-deductible health plan.
Contributions to an HSA for 2022 are limited to $3,650 for self-only coverage and to $7,300 for family coverage. An additional $1,000 “catch-up” contribution can be made by individuals age 55 or older. Thus, if you are eligible to contribute to an HSA and have not made the maximum contribution for 2022, consider doing so. HSA funds are yours to keep – unlike a flexible spending account, unused money in your HSA is not forfeited at the end of the year.
Recognize Capital Losses to Offset Capital Gains
If you are fortunate enough to have realized capital gains in 2022, consider selling some investments before December 31, 2022, that have declined in value to offset some or all of those capital gains. However, be careful to avoid the “wash-sale” rule which prohibits claiming a loss on the sale of a stock or a security if the same or “substantially identical” stock or security is purchased either 30 days before or after the sale date.
Investing in a Qualified Opportunity Fund
Deferring taxable income by investing in a qualified opportunity fund may be a wise tax move. You can defer tax on capital gains and qualified Section 1231 gains that you realized in 2022 by investing a sufficient amount in one or more qualified opportunity funds within 180 days of realizing the gain. And, if the gain is from a partnership, S corporation, or a non-grantor trust, you have until 180 days from the due date of the entity’s 2022 tax return (excluding extensions) to make the investment. Tax on the reinvested gain can be deferred until the earlier of December 31, 2026, or the date you sell your interest in the qualified opportunity fund(s).
Determine Impact of the Excess Business Loss Limitation
If you incur an “excess business loss” in 2022 from one or more trades or businesses, you may not be able to deduct all of that loss for 2022. An excess business loss is the amount by which the total deductions attributable to all of your trades or businesses exceed your total gross income and gains from those trades or businesses plus a threshold amount (that is adjusted annually for inflation). The threshold amounts for 2022 are $270,000 for single individuals and $540,000 for married individuals that file a joint return. Excess business losses that are disallowed are treated as a net operating loss carryover to the following year.
So, if you anticipate incurring a net business loss in excess of $270,000/$540,000 for 2022, confirm whether or not some of that loss will be disallowed for 2022. Otherwise, you may be in for an unpleasant income tax surprise come April 15, 2023.
Withdraw a Required Minimum Distribution
A required minimum distribution (RMD) is the minimum amount that you must withdrawal from your traditional IRA each year beginning with the year that you turn age 72 (or age 70 ½ if you turned age 70 ½ before January 1, 2020). A RMD for 2022 is calculated by dividing your IRA balance as of December 31, 2021, by a life expectancy factor that the IRS publishes in Publication 590-B (“Distributions from Individual Retirement Arrangements (IRAs)”).
If you fail to withdraw some or all of your RMD in any given year, you may be subject to a penalty equal to 50% of the amount that was not withdrawn. So, if you are required to withdraw a RMD for 2022, make sure you do so by December 31, 2022.
Create an Online Account with the Internal Revenue Service
Creating an online account with the Internal Revenue Service (IRS) will facilitate your ability to obtain information from the IRS. For example, via an online account you can:
- View the amount of tax you owe for a particular tax year
- View five years of payment history, including estimated tax payments
- View any pending or scheduled tax payments
- View key data from your most recently filed tax return
- View any authorization requests from tax professionals
- Approve and electronically sign a Power of Attorney
- Request an Account Transcript
- View your Identity Protection PIN (IP PIN) and request a new IP PIN
You can create an online account by going to www.irs.gov and:
- Click on the “Sign in to Your Account” link
- Click on the “Sign in to your Online Account” link
- Click on the “ID.me Create an account” link
For more information, contact us. We're here to help.
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