As we near the end of another busy year, now is a great time to think about tax planning strategies that will put you in the best possible position for this year’s tax filing. When considering ways to save on taxes, it is important to keep in close contact with your tax professional to identify any significant financial changes you have had this year, along with any new tax rules that may affect you. In order to support your 2022 year-end tax planning, we have put together a list of ideas and considerations to help you feel prepared and hopefully lower your tax liability.

Tips for Individuals

• 2022 Updates: Several adjustments have been made for high inflation in 2022, and more significant adjustments are predicted in 2023.
  • Income Tax Brackets: Though ordinary income tax rates have remained the same for 2022, income brackets are slightly wider than they were in 2021. Similarly, the income brackets for long term capital gains and qualified dividends have widened, while tax rates (0%, 15%, and 20%) have remained the same.
  • Standard Deduction: $25,900 for married couples filing jointly, $12,950 for single filers, and $19,400 for Head of Household status.
  • Social Security: In January 2023, the maximum amount of earnings subject to Social Security tax will increase from $147,000 to $160,200. Additionally, Social Security recipients will have an 8.7% Cost of Living Adjustment (COLA), which will provide a significant increase in Social Security benefits.

• Credits for Dependents: 2021 brought numerous tax benefits for those with dependents, which were only applicable for one year. In 2022, the Child Tax Credit and Dependent Care Tax Credit will return to their pre-2021 form.
  • Child Tax Credit (CTC): The CTC will revert to $2,000 per child ages 16 and younger (in 2021, the credit was $3,600 for children ages 5 and younger and $3,000 for children ages 6-17). Additionally, the CTC will not be refundable in 2022 and there have been no advance payments of the credit throughout the year.
  • Child and Dependent Care Tax Credit: In 2022, the Dependent Care Credit only applies to $3,000 of qualified child care expenses for one child, or $6,000 for two or more children. The maximum percentage of qualified expenses allowable for the credit has dropped from 50% to 35%, which means the maximum credit is $1,050 for one child and $2,100 for more than one child. Families earning under $15,000 per year are eligible to receive the full credit, as compared to $125,000 in 2021. The credit starts to phase out for families earning more than $15,000 per year.

• Charitable Contributions
  • For those who itemize, consider making additional charitable contributions prior to December 31st to reduce your tax liability. Always keep records of your contributions and keep in mind that the cash contribution limit of 60% of your Adjusted Gross Income is back in place for 2022.
  • For those taking the standard deduction, the $300 (or $600 married filing jointly) above-the-line charitable contribution deduction is no longer available in 2022.

• Accelerate Deductible Payments
  • Mortgage Interest: Pay your January 2023 mortgage payment prior to December 31st and deduct an extra month of mortgage interest in 2022
  • Real Estate Taxes: Pay real estate taxes due in 2023 before December 31st. Note that the amount of state and local taxes that you can deduct per year is limited to $10,000.

• Required Minimum Distributions (RMDs): The SECURE Act delayed the age which you are required to take RMDs from the year during which you turn 70.5 to the year during which you turn 72. Additionally, retirees will notice a slight reduction in their RMD amount in 2022 due to an adjustment for increase in life expectancy.
  • As in prior years, always be sure to take your RMD by the close of the year. If you do not, there is an additional tax of 50% of the amount that should have been withdrawn from your retirement account
  • Consider making a Qualified Charitable Distribution from your IRA, which counts toward your RMD amount and will also reduce your taxable income from your IRA.

• Your Investments: Given the performance of the stock market in 2022, you may have incurred capital losses. Capital losses reduce income from capital gains dollar-for-dollar. This may be an opportunity to sell appreciated assets that you no longer wish to hold. Additionally, capital losses in excess of capital gains can reduce ordinary income by up to $3,000. Always consider relevant details such as holding periods of securities before making investment decisions.

• Retirement Savings: A pre-tax retirement account is an excellent way to lower your tax liability in the current year while saving for your future. A Roth IRA does not reduce your taxable income in the current year, but instead provides future tax benefits. Both are subject to annual contribution limits and must be funded by April 15, 2023.
  • Employees can defer up to $20,500 of income in a 401(k), 403(b) or 457 plan ($19,500 in 2021). Those over 50 are eligible to contribute an additional $6,500.
  • SIMPLE IRA contributions are limited to $14,000, plus an extra $3,000 for people 50 and over.
  • Traditional IRA and Roth IRA limits are still $6,000 plus an extra $1,000 for individuals 50 and over. The income ceilings on Roth IRAs have increased to $214,000 for couples and $144,000 for singles.

• Avoid Underpayment Penalties: Do you anticipate owing additional taxes when you file this year? Consider making an additional estimated tax payment to avoid underpayment penalties. Also, it is not too late to have additional taxes withheld by your employer. Taxes withheld by your employer are considered to be paid throughout the year, which further reduces underpayment penalties. Your tax professional can help you determine an appropriate amount of tax to pay or have withheld.

Tips for Businesses

• Asset Purchases: If you are considering purchasing an asset such as machinery or equipment for your business in 2022, you may be eligible to expense the entire cost of the asset under Section 179 expensing or Bonus Depreciation. Note that the dollar limit for Section 179 depreciation has increased to $1,080,000 (up from $1,050,000) in 2022.

• For Corporations: If you expect your closely held C Corporation to have a profitable year in 2022, consider paying a year-end bonus to lower corporate tax liability. Wages are fully deductible by the corporation and will only be taxed once at the individual’s tax rate. Alternatively, there may be advantages to paying corporate dividends rather than wages to high-income taxpayers, even when double taxation is considered. At the individual level, qualified dividends are taxed at a maximum rate of 20%, while wages can be taxed as high as 37% plus an additional 0.9% Medicare tax. Talk with your tax advisor about the most beneficial way to pay out corporate earnings and weigh all of the relevant factors such as your filing status and total taxable income.

• Employee Retention Credit (ERC): The ERC, which benefitted employers who kept employees on the payroll in 2020 and 2021, will not be available in the 2022 tax year.

• Meals and Entertainment: All business meals purchased from restaurants will continue to be 100% deductible in 2022, while entertainment is not deductible. Be sure to keep good records of expenditures on meals versus entertainment to determine which expenses are eligible to be deducted.

These are just a few opportunities to reduce your tax liability in 2022. Depending on your specific situation, there may be more. As always, your Dermody, Burke & Brown tax professional is here to help with any of your tax planning questions.

The information reflected in this article was current at the time of publication.  This information will not be modified or updated for any subsequent tax law changes, if any.