As we wrap up 2022, it’s important to take a closer look at your tax and financial plans and discuss steps that can be taken to reduce taxes and help you save for your future. Though there has been a lot of attention to tax law changes, inflation and environmental sustainability, there has been smaller impacts on taxes this year resulting from compromise on tax regulation. However, with the passage of the Inflation Reduction Act and CHIPS Act this year, there are new incentives for individuals and businesses to consider. There are also several tax provisions that have expired or will soon. Take a look at some issues impacting Individuals and businesses to consider as we approach year-end. First, let’s start with Individuals:
Charitable contribution planning
If you are planning to donate to a charity, it’s likely better to make your contribution before the end of the year to potentially save on taxes. There are many tax planning strategies we can discuss with you about charitable giving. For example, consider donating appreciated assets that have been held for more than one year, rather than cash. Opening and funding 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. Qualified charitable distributions (QCDs) are another option for certain older taxpayers who don’t typically itemize on their tax returns.
Last year, individuals who did not itemize their deductions could take a deduction of up to $300 ($600 for joint filers). However, this opportunity is no longer available for tax year 2022. Also, note that it’s important to have adequate documentation of all donations, including a letter from the charity for donations of $250 or more.
Required minimum distributions (RMDs)
You cannot keep retirement funds in your account indefinitely. RMDs are the minimum amount you must annually withdraw from your retirement accounts once you reach a certain age (generally age 72). Failure to do so can result in penalties. And withdrawals usually have tax impacts. There are also opportunities to roll retirement funds to a qualified charity to satisfy the RMD without incurring taxes. Also, note that the IRS has issued new life expectancy tables effective for the 2022 tax year, resulting in lower RMD amounts. We can help you calculate any RMDs to take this year and plan for any tax exposure.
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.
Additional tax and financial planning considerations
We recommend you review your retirement plans at least annually. That includes making the most of tax-advantaged retirement saving options, such as traditional individual retirement accounts (IRAs), Roth IRAs and company retirement plans. It’s also advisable to take advantage of health savings accounts (HSAs) that can help you reduce your taxes and save for medical-related expenses.
Also, if you withdrew a Coronavirus distribution of up to $100,000 in 2020, you’ll need to report the final one-third amount on your 2022 return (unless you elected to report the entire distribution in 2020 or have recontributed the funds to a retirement account). If you took a distribution, you could return all or part of the distribution to a retirement account within three years, which will be a date in 2023. We would like to work with you to strategize a plan to help restore and build your retirement savings and determine whether you’re on target to reach your goals.
Here are a few more tax and financial planning items to discuss with us:
- Life changes –– Let us know about any major changes in your life such as marriages or divorces, births or deaths in the family, job or employment changes, starting a business and significant expenditures (real estate purchases, college tuition payments, etc.).
- Capital gains/losses –– Consider tax benefits related to using capital losses to offset realized gains –– and move any gains to the lowest tax brackets, if possible. Also, consider selling portfolio investments that are down before the end of the year. Net capital losses can offset up to $3,000 of the current year’s ordinary income. The unused excess net capital loss can be carried forward to use in subsequent years.
- Estate and gift tax planning –– Let’s make sure you’re appropriately planning for estate and gift tax purposes. There is an annual exclusion for gifts ($16,000 per donee in 2022, $32,000 for married couples) to help save on potential future estate taxes. Let’s review lifetime gift and generation skipping transfer (GST) opportunities to use additional exclusions and exemption amounts.
- State and local taxes –– More people are working from home (i.e., teleworking). Such remote working arrangements could potentially have tax implications that should be considered. Let us help you with your state income, sales and use tax questions.
- Education planning –– Let’s consider Sec. 529 plans to help save for education; there can be income tax benefits to do so, and we can help you with any questions.
- Updates to financial records –– Let’s determine whether any updates are needed to your insurance policies or beneficiary designations.
- Roth IRA conversions –– Let’s discuss and weigh the benefits of converting your traditional IRA to a Roth IRA to lock in lower tax rates on some of your pre-tax retirement accounts.
- Estimated tax payments –– Let’s review withholding and estimated tax payments and assess any liquidity needs.
Analysis of your financial statements
Let’s look at where your business is positioned with income and expenses to close out the tax year. This may mean getting caught up on your bookkeeping to have a better picture of where your tax situation stands. We can help you analyze your financial statements for tax savings and planning opportunities.
Deferral of income and accelerating expenses
Many times, there may be strategies such as deferral or acceleration of income or prepayment or deferral of expenses, that can help you save taxes and thereby strengthen your financial position. For example, in terms of property and equipment purchases, you may benefit from making these purchases before the end of the year. Many purchases can be completely written off by businesses in the year they are placed in service. Plus, there are tax-favorable rules that permit qualified improvement property to qualify for 15-year depreciation and, therefore, also be eligible for 100% first-year bonus depreciation.
Certain write-off benefits are set to decrease after the end of the year unless it is extended. Thus, it’s very important to consider the timing of your capital purchases. Let us help you receive the best tax treatment.
As you enter the holiday season and have more social gatherings with your customers and employees, keep in mind the rules for business meal deductions. There is a 100% deduction (rather than the prior 50%) for expenses paid for food or beverages provided by a restaurant. This provision expires at the end of 2022.
Net operating losses (NOLs)
If your deductions for the year are more than your income for the year, you may have an NOL. In general, you can use an NOL by deducting it from your income in other year(s), but it is limited to 80% of your taxable business income in any one year. We can advise you on any potential tax benefits and limits.
Energy tax credits
There are many tax incentives to encourage businesses to decrease their carbon footprint and become more environmentally sustainable.
When certain criteria are met, businesses may be able to claim tax credits for items such as:
- Electricity produced from certain renewable sources (including geothermal, solar and wind facilities)
- Energy efficient home improvements (only available to eligible contractors and manufactured home manufacturers)
- Carbon oxide sequestration
- Zero-emission nuclear power production
- Alternate fuels
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.
Additional tax and financial planning considerations
- Deferred self-employment or payroll taxes from 2020 –– If you deferred taxes from 2020, the second 50% payment is due by Dec. 31, 2022. The payment process is the same as the first 50% payment you should have made by Dec. 31, 2021.
- Employee retention credit (ERC) –– The ERC encouraged businesses to keep employees on their payroll during the pandemic. Although these credits relate to tax years 2020 and 2021, applying for these credits is still available. The IRS warned employers to be cautious of third parties taking improper positions related to ERC eligibility, as claiming the credit inaccurately can result in severe consequences. We can help you appropriately navigate the ERC.
- Charitable contributions –– For tax year 2022, the maximum allowable contribution deduction is limited to 10% of a corporation’s taxable income (as compared to the temporary increase of 25% that was in effect last year).
- Partnership audit and adjustment rules –– Changes to the partnership audit and adjustment rules have been in effect for a few years but we are still seeing some partnerships and their partners be blindsided at the unpleasant consequences that can arise from these rules. Careful planning today can help mitigate any unfavorable consequences to both the entity and the partners themselves. Also, be aware that even if your business isn’t a partnership, you’ll want to evaluate the effect these rules could have if you’ve invested in any partnership.
- IRS Forms K-2 and K-3 –– These new forms can require much effort and potentially apply to even smaller entities. The IRS announced an additional exception to the requirement to complete and provide these forms. Let’s discuss this exception’s applicability to your situation and otherwise strategize to comply with this new and important requirement.
- Digital assets and virtual currency –– 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 enhance its scrutiny in this area. We can help you understand any tax and investment consequences.
- State and local tax considerations –– Businesses have numerous state and local tax matters to consider for compliance and planning purposes, including where income and sales are subject to tax, sourcing of income and the application of elective taxes that many states have for partnerships and S corporations. Let us help you with your state and local income tax needs, including sales/use and franchises taxes.
- Preparing for disasters –– Do you have a disaster recovery plan in place for your business and, if so, have you updated it recently? We can help you review your plan, especially as it relates to financial information.
- Retirement plans –– Have you revisited your company’s retirement plan lately? Let’s take a look at the many retirement savings options to make sure that you are taking advantage of tax deductions as well as providing opportunities for employees (and owners) to save for retirement.
Estimated tax payments –– Let’s review estimated tax payments and assess any liquidity needs.
Year-end planning equals fewer surprises
Whether it’s working toward a tax-optimized retirement or getting answers to your tax and financial planning questions, we’re here for you. Please contact our office today to set up your year-end review. As always, planning ahead can help you minimize your tax bill and position you for greater success.