2022 Mid-Year Tax Planning

2022 Mid-Year Tax Planning: The year’s halfway over, so now what?

2021 is over, and most taxpayers have filed their income tax returns. Now is the time to think about financial and income tax considerations for 2022. The lingering effects of COVID-19 mean worldwide supply chain issues and record inflation. Taxpayer income may not rise as much as expenses - and saving on income taxes could be very beneficial. While uncertainty surrounds passage of President Biden’s tax plan, if 2022 sees new tax legislation, both corporations and individuals could be looking at higher tax rates in upcoming years. 

The outcome of the mid-term elections will likely have a significant impact on whether this legislation advances. We continue to monitor these developments and we will notify you of any changes. Now is a good time to look at what your 2022 tax situation looks like based on current law. Here are some tax planning considerations to think about this summer:

Consider Adjusting Your Tax Withholding or Estimated Tax Payments
Because no taxpayer appreciates a smaller refund or larger bill than expected, adjusting withholdings or estimated payments could help reduce the chance of this happening. Doing this may also avoid too much of annual income tax refund, since, while tax refunds are mostly welcome, it is still an interest free loan to government.

Individuals should review their W-4 and look at the IRS’s “Tax Withholding Estimator at www.irs.gov/individuals/tax-withholding-estimator. This is only an estimator - if you would like a more accurate result, we would be glad to prepare a projection. For those of you who make estimate payments we will gladly review your tax situation.

Take Advantage of Lower Tax Rates on Investment Income
Gains from the sale of an investment held for more than one year (as well as dividends on certain stocks) are generally taxed at preferential capital gains rates. Those rates are 0%, 15%, and 20% for most investments. The applicable rate depends on your taxable income. If your income is too high to benefit from the 0% or 15% rates, try gifting investments (like appreciated stock or mutual fund shares) to children, grandchildren, or other loved ones.

Other options to possibly decrease total taxable income to qualify for the lower rates include deductible IRA contributions or reduce taxable wages by deferring bonuses or contributing to employer retirement plans, if you’re over the age of 70½, making contributions to a qualified charity with a direct distribution from your IRA or possibly accelerating deductible expenses into this year. In addition, due to the recent downturn in the stock market, it may be beneficial to harvest losses to offset current or potentially future capital gains.

Regarding the timing of investment transactions, based on potential rate increases under the President’s tax proposals, it may make sense to recognize capital gains before year end. As we indicated, we will continue to monitor the status of current tax proposals, and update you on important changes as they become known.

Check Your Tax Deduction Strategy
It’s generally best to itemize your deductions if you have significant personal expenses. However, don’t rule out the standard deduction. In 2022, joint filers can enjoy a standard deduction of $25,900. The standard deduction for heads of household is $19,400, and single taxpayers (including married taxpayers filing separately) can claim a standard deduction of $12,950.

For older taxpayers (over age 70½) who won’t itemize in 2022 but still want to make contributions, a Qualified Charitable Distribution (QCD) from an IRA is a great way to give to charity. Also, as indicated above, making a direct contribution from the IRA to the charitable organization has the added value of not increasing the taxpayer’s Adjusted Gross Income (AGI), which can decrease the amount of Social Security benefits that is taxable, as well as affecting other favorable tax provisions that phase out based on AGI. Please note that a QCD will count towards the taxpayer’s required minimum distribution.

Virtual Currency
Virtual currency has been rising in popularity recently, although decreases in value in this type of investment have occurred. A complete review of the taxation of virtual currency transactions is beyond the scope of this article; however, there are a few fundamentals to be aware of. For tax purposes, virtual currency is treated as property and your basis is the fair market value on the date you received it. Any purchase with or receipt of virtual currency is a taxable transaction and subject to both income and Social Security taxes. Contact us and we will be glad to put together a strategy to reduce your liability on virtual currency transactions.

Reverse Mortgages
If you’re age 62 or older, and have substantial equity in your personal residence one way to meet cash flow needs may be to get a reverse mortgage. This strategy can allow you to receive loan proceeds over a certain period by borrowing against the equity in the home. The reverse mortgage loan proceeds can help with current cash flow needs; however, there is no tax deduction for the accrued mortgage interest until the reverse mortgage is paid off. 

Planning for Small Business
Here are a few strategies for small businesses to minimize their 2022 tax bills:

• Section 179 Expense and Bonus Depreciation. Taking advantage of Section 179 and Bonus depreciation is an easy way to help reduce the tax liability for your business. Section 179 allows an expense of $1,080,000 based on taxable income limitations. Bonus depreciation has no taxable income limitation, but other limitations could apply. Also, for 2023 bonus depreciation will be reduced from 100% to 80%, so if you are planning on equipment purchase in early 2023 let us help you plan out your decision.
• Retirement plan contributions. Having an existing or establishing a qualified retirement plan for your business allows you to make deductible contributions for 2022 while allowing the earnings in the plan to build up without taxation until the funds are withdrawn. There are limits on the amount that may be contributed to a plan, depending on the type of plan.
  • One benefit of making contributions to a qualified retirement plan is that the contribution may not need to be made by the end of 2022. The employer portion of the contributions can sometimes be made as late as 10/16/23.
  • In addition to making current year deductions, you may be eligible for two tax credits. A small employer who starts a new retirement plan is eligible for a nonrefundable income tax credit of up to the greater of (1) $500 per year or (2) the lesser of $250 per eligible employee or $5,000 for the administrative and retirement-education expenses of adopting a new qualified defined benefit or defined contribution plan, a SIMPLE IRA plan, an annuity plan under 403(a), or a SEP. A second tax credit exists for small employers who include an auto-enrollment feature in a qualified plan. Eligible employers that include an Eligible Automatic Contribution Arrangement (EACA) in a qualified plan can claim an annual credit of $500 for up to three tax years. The credit also is available to employers who convert an existing plan to an automatic enrollment design.
• Other ideas – Employing Family Members and Business Meals Deductions. Two other ways to reduce your business’ tax liability are employing family members and expensing business meals. Your family member must be a bona fide employee, and basic business practices, such as keeping time reports, filing payroll returns, and basing pay on the actual work performed, should be followed. The deduction for business meals was increased from 50% to 100% for 2021 and 2022. If you have any business meals planned for early 2023 you might want to take advantage of the increase while it last and move them to late 2022.