Driving down the streets, you can see lights, Christmas trees, and other decorations on nearly every corner – which can only mean one thing: Another year-end is upon us. You’re probably like us, wondering where 2022 went! The year has certainly flown by for us here at Culpepper CPA.
This time of year, it’s top of mind for many to find ways to save money. When thinking of this, it’s important to remember the value that year end tax planning can provide. Below, we have included a limited checklist of suggestions. While not inclusive, the purpose of this is to help you identify and take advantage of potential tax breaks as well as point out a few tax changes that are taking place for 2022.
2022 Year End Tax Planning
- Have a tax projection prepared. Know where you stand before determining what tax planning actions to take or what value can be derived from them. This will help determine what steps to take. For example, if you expect overall income to be lower in 2023, you might want to take steps to accelerate deductions or defer income from 2022. This could result in an overall tax savings AND create a time value of money benefit. You may also find that you are eligible to itemize deductions in one year and not in the other. Accelerating or deferring these deductions to “batch” them can often be very advantageous.
- Ask your financial advisor about tax loss harvesting. If you have unrealized losses in a particular holding, it might be helpful to sell that holding before year end. That will allow you to recognize the loss in 2022, potentially offsetting other realized gains. You can still reacquire these positions later. You just need to wait at least 31 days to avoid a wash sale.
- Complete your charitable giving by year end. Make your donations by December 31st for them to be deductible in the 2022 tax year.
- Consider making gifts of up to $16,000 to children, other family members, or any number of other recipients. While this isn’t a deduction for you as the giftor, gifts are tax free to recipients. This is a great way to transfer wealth tax-free. Gifts under this annual threshold do not count against your lifetime estate tax exemption. If you want to really bulk on up wealth transfer, consider gift splitting and gifting to multiple recipients.
- Consider funding a Flexible Savings Account or Health Savings Account if offered by your employer. This can lower your taxable W-2 wages. An HSA, in particular, has a triple tax benefit – a tax deduction for your contributions, no tax on investment earnings, and no tax on withdrawals if used for qualified medical expenses.
- Maximize contributions to your employer retirement plan such as a 401(k) or 403(b). In addition to funding your retirement, contributions are tax deductible in the year funded and aren’t taxable until withdrawn. The maximum contribution amount for 2022 is $20,500 (or $27,000 if you qualify for catch-up contributions).
- Consider whether a qualified charitable distribution (QCD) may be beneficial to you. You could reduce your taxes and help a charity at the same time! If over 70 ½, you can donate up to $100,000 directly from your IRA to a qualified charity. While the donation would not be eligible for a tax deduction, it doesn’t count as a taxable withdrawal for you. It also counts toward your required minimum distributions (RMDs) for the year.
- Be sure to take your required minimum distribution. If you are over age 72 with certain IRAs, you could be subject to a 50% penalty on the portion not taken. However, The IRS issued Notice 2022-53 on Oct. 7, 2022. This notice provided RMD relief by waiving the excise tax for missed 2021 and 2022 RMDs on inherited retirement accounts for beneficiaries subject to the SECURE Act 10-year payout rule.
- Consider increasing your income tax withholding to avoid penalties. This is especially important if you owed tax in 2021. Review tax withholding from your paystub and estimated tax payments if your income fluctuates during the year.
- Consider funding a 529 education savings plan. This is another item that doesn’t provide any current tax deduction; however, these contributions grow tax free and distributions are also tax free if used for qualified education expenses. This is a great way to save for future education expenses of a child or grandchild.
2022 Tax Law Changes
There are a few other tax items to be aware of for 2022. In 2021, the American Rescue Plan was signed to provide tax relief. In addition to a third round of stimulus checks, this bill provided various tax benefits for 2021 that have now either expired or reverted back to pre 2021 levels. These tax benefits included:
- Child Tax Credit – the 2021 credit was increased from a maximum of $2,000 up to $3,600. This credit reverts back to $2,000 for 2022-2025, and each dependent must be under age 17.
- Child and Dependent Care Credit – this credit amount reverts back to pre- 2021 levels of a maximum of 35% of up to $3,000 per child up to age 13 (maximum of $6,000 total). In 2021, the maximum credit was up to $8,000 for two children.
- Earned Income Credit – In 2021, this credit was expanded. It was nearly tripled for those without children. It also allowed those between the ages of 19-25 to qualify. For 2022, the age requirement goes back to 25-65 for those without children.
- For 2022, you can no longer deduct $300 (or $600 for joint filers) in cash donations “above the line”. You are back to having to itemize your deductions in order to claim any benefit for charitable contributions.
- President Biden signed the Inflation Reduction Act on August 16, 2022. This massive $739 billion legislation was designed to reduce the deficit and eventually inflation by combating climate change, lowering healthcare costs, and increasing taxes on some large corporations. Electric Vehicle tax credits are a notable part of the new law’s clean energy focus. For more details on these credits, see Electric Vehicle (EV) and Fuel Cell Electric Vehicle (FCEV) Tax Credits.
In Conclusion
At Culpepper CPA, we aim to be a valuable resource for all of your tax and accounting needs. We stay on top of constantly changing tax laws and can answer any questions on year end tax planning. We can prepare 2022 tax projections to help estimate your tax liability. Then we can analyze that projection to help you find possible ways to help reduce your tax burden. With several 2021 tax laws expiring, be sure you have enough tax paid into the IRS to avoid underpayment penalties. Strategize with a professional for any additional deductions available. We provide a full range of in-depth tax planning and consulting services and are here to help you proactively manage your tax situation. Contact us today, while there’s still time, if we can help you with your year end tax planning.
