Year-End Tax Planning
To Our Clients and Friends:
We're approaching the end of the year, which means it's time to think about things you can do to reduce your 2022 federal tax bill. Although there are no guarantees, it looks like planning for income taxes may be a little simpler this year than in the past few years. With midterm elections approaching, Congressional attention may be focused elsewhere, and we may have all the tax legislation we are going to get this year.
- Look for Ways to Defer Taxable Income. Deferring taxable income (which includes accelerating deductions) when it makes sense is a good idea in an inflationary environment.
- Evaluate Your Investment Assets with an Eye Toward Selling. Look at your investment portfolio to see if selling before year-end makes tax sense. If you have recognized capital losses this year (or have capital loss carryovers from previous years), you can use those losses to shelter 2022 capital gains.
- Bunch Itemized Deductions to Maximize Their Value. You can deduct the greater of your itemized deductions (mortgage interest, charitable contributions, medical expenses, and taxes) or the standard deduction. For 2022, the standard deduction is $25,900 for joint filers, $19,400 for HOH, and $12,950 for single taxpayers. If your total annual itemizable deductions for 2022 will be close to your standard deduction amount, consider bunching your expenditures so that they exceed the standard deduction in one year, and then use the standard deduction in the following year.
- Make Your Charitable Giving Plans. Donor-advised funds allow donors to make a charitable contribution to a specific public charity or community foundation that uses the assets to establish a separate fund to receive grant requests from charities seeking distributions from the advised fund. If you donate appreciated assets to a public charity, you can deduct the full fair market value of the donated asset. If you are age 70% or older, consider a direct transfer from your IRA to a charity [known as a Qualified Charitable Distribution (QCD)]. While you will not be able to claim a charitable donation for the amount transferred to the charity, the QCD does count toward your Required Minimum Distribution (RMD).
- Evaluate Intrafamj/y Loans. You can lend money to relatives without any tax consequences if you charge interest at least equal to the Applicable Federal Rate (AFR), which is published by the [RS monthly. The lower than. what commercial lenders offer, thus allowing the borrower to save money on interest expense. Making intrafamily loans is still an attractive option, but it's important to be sure you are charging a rate that won't create a taxable gift, unless that is your intention.
- Take Advantage of the Annual Gift Tax Exclusion. The basic estate, gift, and generation skipping transfer tax exclusion is scheduled to fall from $12.06 million ($24.12 million for married couples) in 2022 to $5 million ($10 million for married couples) in 2026. For 2022, you can make annual exclusion gifts up to $16,000 per donee, with no limit on the number of donees.
If you own a business, consider the following strategies.
- Maximize Retirement Plan Contributions. You can make deductible contributions to several types of retirement plans, while earnings in the plan accumulate tax-free until they are withdrawn. For example, if you're self-employed and set up a SEP-IRA, you can contribute up to 20% of your self-employment earnings, with a maximum contribution of $61 ,000 for 2022. ff you're employed by your own corporation, up to 25% of your salary can be contributed with a maximum contribution of $61 ,000. Other small business retirement plan options include the 401(k) plan (which can be set up for just one person), the defined benefit pension plan, and the SIMPLE-IRA. Be aware that if your business has employees, you may have to cover them too.
- Plan Your Business Asset Purchases. The bonus depreciation rate is scheduled to drop from the current 100% deduction to 80% of the cost of qualified property placed in service after 2022. So, placing a qualified asset in service by the end of 2022, rather than waiting until 2023, can have a big impact since you will be able to deduct the entire cost of that asset this year. Some assets that don't qualify for bonus depreciation are eligible for Section 179 expensing. For qualifying property placed in service in tax years beginning in 2022, the maximum Section 179 deduction is $1.08 million.
- Take Advantage of Larger Deductions for Business Meals. Normally, the deduction for business meals is limited to 50% of the meal's total cost. However, the cost of food and beverages provided by a restaurant that is paid or incurred in 2022 is 100% deductible (assuming the meal qualifies as a business meal). If you use the per diem method to reimburse employees for business expenses, you can treat the entire meal portion of the per diem rate paid or incurred in 2022 as being attributable to food or beverages provided by a restaurant, making the meal per diem 100% deductible.
This letter only covers some of the year-end tax planning moves that could potentially benefit you, your family, and your business. Please contact us if you have questions, want more information, or would like us to help in designing a year-end planning package that delivers the best tax results for your particular circumstances.