2022 Year-End Planning

Stock and Other Asset Sales

Taxpayers should consider managing year-end sales of their investments to control their capital gain tax bracket.

• Long-term capital gain from sales of assets held for over one year is taxed at 0%, 15%, or 20%, depending on the taxpayer’s taxable income. In addition, a 3.8% Net Investment Income Tax may apply to those with adjusted gross income of $250,000 married filing joint or $200,000 for single or head of household filers.
• If a taxpayer is considering selling short- or long-term appreciated assets, they should also consider selling assets with losses to offset some of their gains.
• If making charitable contributions, consider donating appreciated stock instead of selling stock and donating the proceeds, as the value of the donation is based on the value of the stock at the date of donation. Donating appreciated stock avoids capital gain recognition on the sale of the stock.
• For sale of property, consider utilizing an installment sale so the gain can be spread out over more than one tax year. Spreading out the gains through an installment sale will decrease the gains reported in the year of sale and may lower the capital gain tax rate while helping escape the 3.8% Net Investment Income Tax.

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Solar Electric Property

Solar property purchased and placed in service may generate federal and state tax credits and is calculated as a percentage of the cost of the qualified solar property placed in service.

• Recent federal legislation has reverted the federal tax credit on applicable solar property to 30% through 2032 while the Hawaii solar tax credit is calculated at 35% (subject to system limitations).

EV Federal Tax Credits

• One of the changes made by the passage of the 2022 Inflation Reduction Act requires final assembly of a qualifying clean vehicle to occur in North America. This requirement is effective for vehicles sold after August 16, 2022 (i.e., the date the legislation was signed into law).
  • Therefore, if an electric vehicle is purchased between August 17 and the end of the year, the purchase will not qualify for the electric vehicle tax credit if the vehicle was not assembled in North America.
• To help determine if a particular vehicle satisfies this new requirement, the U.S. Department of Energy has a general list of vehicles with final assembly in North America on its website. However, before buying a new electric vehicle, you should also check the National Highway Traffic Safety Administration's VIN number decoder to be sure the exact vehicle you intend to purchase qualifies for the new credit.

Standard Deduction

• The amounts for the standard deduction were increased for 2022 to account for inflation.
  • Married couples get $25,900 ($25,100 for 2021), plus $1,400 for each spouse age 65 or older ($1,350 for 2021).
  • Singles can claim a $12,950 standard deduction ($12,550 for 2021) — $14,700 if they're at least 65 years old ($14,250 for 2021)
  • Head-of-household filers get $19,400 for their standard deduction ($18,800 for 2021), plus an additional $1,750 once they reach age 65 ($1,700 for 2021).

"Above-The-Line"

• The "above-the-line" deduction for up to $300 of charitable cash contributions ($600 for married couple filing a joint return) expired at the end of 2021. As a result, this deduction is not available for the 2022 tax year (it was available for 2020 and 2021). Only people who claimed the standard deduction on their tax return (rather than claiming itemized deductions on Schedule A) were allowed to take this deduction.
• The 60%-of-AGI limit on qualified charitable deductions for cash donations by people who itemize is back for 2022 (this limit was suspended for the 2020 and 2021 years which permitted qualified deductions of up to 100% of a taxpayer’s adjusted gross income).

Itemized Deductions

Charitable Contributions – consider bunching charitable contributions into 2022 charitable gifts you would usually give over multiple years.

• Home interest – if a taxpayer pays their January 2023 mortgage bill before year-end, they may be able to deduct the interest portion on Schedule A of their 2022 income tax return.
• State and local taxes - if a taxpayer is under the $10,000 cap they can consider pre-paying state and local taxes (if allowable by jurisdiction) be deducted in the 2022 tax return if itemizing deductions.
• Medical Expenses - consider incurring additional medical expenses before year-end if your expenses are near or have topped the 7.5%-of-adjusted-gross-income threshold. Eligible medical expenses include out-of-pocket payments to doctors, dentists, optometrists and other medical professionals; mental health services; health insurance and Medicare premiums; prescription drugs; glasses and hearing aids. Also, the unreimbursed cost of long-term care and certain home improvements to accommodate a disability or physical illness, such as a ramp and wide doorways.

Child Tax Credit

• For 2022, the child tax credit reverts to $2,000 per child under age 17 if your modified adjusted gross income is $400,000 or below (married filing jointly) or $200,000 or below (all other filers). The child tax credit phases out with income above these levels.

Retirement Contributions

Many key dollar limits on retirement plans and IRAs are higher in 2022.

• The 2022 contribution limit for traditional IRAs and Roth IRAs remains $6,000, plus $1,000 as an additional catch-up contribution for individuals age 50 and up. However, the income ceilings on Roth IRA contributions increased. Contributions phase out in 2022 at adjusted gross incomes (AGIs) of $204,000 to $214,000 for couples and $129,000 to $144,000 for singles (up from $198,000 to $208,000 and $125,000 to $140,000, respectively, for 2021).
• Deduction phaseouts for traditional IRAs also start at higher levels in 2022, from AGIs of $109,000 to $129,000 for couples and $68,000 to $78,000 for single filers (up from $105,000 to $125,000 and $66,000 to $76,000 for 2021). If only one spouse is covered by a plan, the phaseout zone for deducting a contribution for the uncovered spouse starts at $204,000 of AGI and ends at $214,000 (they were $198,000 and $208,000 for 2021).
• The maximum contribution limits for 401(k), 403(b) and 457 jumps from $19,500 to $20,500 for 2022, while people born before 1973 can put in $6,500 more as a "catch-up" contribution. The 2022 cap on contributions to SIMPLE IRAs is $14,000 ($13,500 in 2021), plus an extra $3,000 for people age 50 and up.

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Roth IRA Conversions

• Taxpayers can convert funds from tax-deferred savings accounts to a Roth IRA though must pay taxes on the converted amount (if there were non-deductible contributions to a tax-deferred retirement account taxes will not have to be paid on your basis). Taxpayers should be cautious on whether any funds converted to a Roth IRA will push them into a higher tax bracket.

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Backdoor Roth IRAs

• A backdoor Roth IRA is a retirement strategy where a taxpayer ineligible to make a direct Roth IRA contribution due to income limitations makes a non-deductible contribution to a traditional IRA and then immediately converts the account to a Roth IRA through their brokerage firm. The Roth IRA income phase out amounts are reported above.

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Gifting

The annual gift exclusion for 2022 is $16,000 per donee and $32,000 (for 2 spouses). The annual gift exclusion increases to $17,000 per donee and $34,000 (for 2 spouses) for 2023.

• Estate and Gift Tax Limits – The estate and gift tax exemption is $12.06 million per individual ($24.12 million for a married couple) for 2022 and will be $12.92 million per individual ($25.84 million for a married couple) for 2023.

Bonus Depreciation

Section 179 Expense

• Under Section 179, businesses can expense up to $1,080,000 of new or used business assets. This limit phases out once more than $2.7M of assets are placed into service during 2022. Unlike bonus depreciation, the amount of Section 179 expenses cannot exceed the business’ taxable income.

Business Vehicle Depreciation

• The first-year ceiling is $19,200 for new and used car first put into service during 2022 if bonus depreciation is claimed.
  
• The second- and third-year depreciation limits are $18,000 and $10,800. If no bonus depreciation is taken, the first-year ceiling is $11,200.


‘Heavy’ SUV limit – buyers of heavy SUVs (SUVs with a gross weight rating over 6,000 lbs) can write off the full cost of the vehicle the year it is placed into service.

Qualified Business Income

• Self-employed (Schedule C filers), LLC, and S-Corporation owners of specified service trade or businesses can deduct 20% of their qualified business income subject to limitations for individuals with taxable incomes of more than $340,100 for joint filers and $170,050 for all other filers. Taxpayers close to these limits should consider accelerating deductions or deferring income to meet the income thresholds. A specified service trade or business includes services in the fields of health, law, accounting, actuarial science, performing arts, consulting, athletics, financial services, brokerage services, or any trade or business where the principal asset of that trade or business is the reputation or skill of one or more of its employees.

Cash Basis Taxpayers

• Businesses operating under the cash basis method of accounting can postpone year-end billings to collect less revenue in 2022. Conversely, if a taxpayer anticipates being in a higher individual tax bracket for 2023, they can speed up their pass-through business’s 2022 billings.
  
• Cash basis businesses can also ‘juggle’ their income by shifting selected expenses from one year to another. Consider charging expenses to a credit card as this permits a deduction in the current year even in paid in a subsequent year. Please note that C-Corporations are still taxed at a flat 21-percent on their taxable income.

Accrual Basis Taxpayers

Accounts Receivables should be reviewed to determine which accounts will be uncollectible and should be written off.

• Prepaid expense accounts should be reviewed to write-off items used prior to the end of the year.
• An accrual basis corporation can take a deduction for its current tax year for a bonus not actually paid to its employee until the following tax year if:
• The employee does not own more than 50% in value of the corporation’s stock,
• The bonus is properly accrued on its books before the end of the current tax year,
• The overall bonus pool is fixed at year-end, and
• The bonus is actually paid within the first two and a half months of the following tax year.
• Bonuses paid to S corporation employee-shareholders are ineligible to be accrued.