Why year-end planning?
We are told to act before year end because it is our last chance to have an impact on our 2022 taxes. Planning throughout the year could be even better, if you recognize when to act, but most of us are pulled in so many directions that it is hard to organize and act until there is an external pressure, such as the looming end to the calendar year. So, when you are ready to take stock of your situation, you can make the planning effort even more productive by reviewing your investments, estate plan, and finances, not just your taxes – consider it a “financial checkup.”
This year, there are changes that occurred due to inflation as well as legislation. While we had expected tax increases, none materialized (there may still be tax law changes, but legislation such as the “SECURE Act 2.0,” child credit and tax extenders all remain in flux). We review the changes that did occur before turning to actual year-end tax planning strategies.
Impact of inflation
Is there ever a good side to inflation? Perhaps the IRS adjustments to several tax-related thresholds that change for 2023 count, such as these:
The standard deduction MFJ $27,700 up from $25,900
The gift and estate tax credit $12.92 million from just over $12 million
The annual gift tax exclusion $17,000 up from $16,000
401(k) maximum contribution $22,500 plus $7,500 (for over 50)
IRA max. $6,500 plus $1,000
SEP-IRA max. $66,000
The tax brackets at which rates increase have also gone up, so more is taxed at lower the brackets.
Inflation Reduction Act
The Inflation Reduction Act passed this summer and included changes to tax laws regarding energy saving credits. The Act also contained other provisions, such as the 15% AMT for C corporations and 1% stock buyback tax. It’s unfortunate that the abbreviation for the act is IRA, as we already have that in our tax lexicon.
Beginning in 2023, this new law changes conditions for obtaining the $7,500 credit for new electric vehicles (EVs) and adds a $4,000 credit for used EVs (EVs that are 2 or more years old). The Act also expanded the reporting requirements for the credits on your tax returns. Finally, EV buyers can monetize the credit at purchase to reduce the sale price, rather than wait for their tax filing. Remember there is also a credit for installing a home charger.
To obtain a credit for new EVs, the battery’s minerals must be extracted or processed in the US or a free-trade partner. The battery must also be manufactured or assembled in North America. Final assembly of the EV must be in North America. There are price ceilings on EVs and income limits on claiming taxpayers.
The Act extend and expanded home energy credits but also expanded the reporting requirements.
Start with this goal: to lessen the total tax due in 2022 and 2023 combined. Usually that means delaying income to 2023 and accelerating deductions to 2022. For 2022-2023, the jump in the standard deduction could mean losing itemized deductions in 2023, so pay special attention to what you can shift to 2022. As we pointed out our post for 2021 year-end planning, if you are concerned about future tax rate increases, you can use a Roth Conversions to bring future income into 2022.
Now to the planning: Can you act at all?
Each year, we advise that you be practical, focusing on where you can actually make moves. For many, the high standard deduction (which is even more for over age 65 taxpayers) means you will not itemize (i.e., your total for itemized deductions is less than the standard amount so you take the higher standard deduction). And, if you are not itemizing, you have fewer ways in which to affect change in the taxes due in either year. If you can itemize, you have more tools for planning.
Tools – income
You can reduce taxable income by maximizing your retirement contributions with your employer via 401(k) or 403(b) plans and IRA contributions if you are below the thresholds. If you are self-employed, you can contribute to your own qualified plan such as a SEP-IRA.
You may also be able to contribute to a health savings or flex account. Be sure to see to use any flex account balances before they expire.
Review your investments to see if you can take losses to reduce capital gains and up to $3,000 of ordinary income. ax loss harvesting reduces net taxable capital gains, but be sure not to run afoul of the wash-sale rule.
Tools – deductions
Review your unreimbursed medical expenses, which you can deduct if the total is over 7.5% of your adjusted gross income.
State and local taxes are capped at $10,000, so you may not be able to shift much between years. And it is difficult to accelerate mortgage interest on first and second homes.
Often, the place for the most change is in charitable deductions, where you can bunch two- or three-years’ worth into a single year so you can itemize. You can use a donor advised fund (“DAF”) to bunch, by contributing all in one year, then having the DAF send annual amounts. Also, you can transfer up to $100,000 from a traditional IRA directly to charity if you are over 70½. Note that Congress has not extended the $300 above the line charitable deduction.
Before you finish, check withholdings and estimates paid
Especially if you increase income in 2022, review your total paid to the IRS and state via withholdings and estimates make sure that you meet the safe harbor rules. If not, you could owe interest for under-withholding.
And remember your estate plan review
As noted above, the federal gift and estate tax credit is close to $12 million for 2022 and increases to $12.92 million in 2023. If you have excess wealth, you may want to gift while you can, especially if you want to use certain trusts, like a GRAT or QPRT. For more on estate planning updates, see our estate planning checkup post.
- If you do review your estate plan documents, also review beneficiary designations and asset ownership to make sure everything is current and flows correctly.
As you review your 2022-2023 tax planning, determine what you can shift and project the impact. Then follow through on the details.
Let us know if you have any questions.
Good luck and best wishes for happy and healthy holidays!