Quick Links to Specific Year-End Tax Planning Strategies & Checklists:
– Year-End Tax Planning & Strategies Overview
√ What’s New for 2022 <– YOU ARE ON THIS PAGE
– Year-End Tax Planning Checklist for Individuals
– Year-End Tax Planning Checklist for Businesses
– Year-End Checklist for Payroll & 1099 Reporting
Year-End Tax Planning – What’s New for 2022
The last few years have seen many modifications to the tax law, many of which have been temporary. The impact on 2022 is multifaceted. Many of these changes are phasing out, and some changes are extending a law that had been scheduled to go away.
The volume of new federal tax legislation we have seen in the last five years is unprecedented:
“TCJA” – Tax Cuts and Jobs Act of 2017 passed late December, 2017 – is a major tax law change which amended the Internal Revenue Code of 1986. Provisions include reducing tax rates, increasing the standard deduction and family tax credits, eliminating personal exemptions, limiting itemized deductions, reducing the alternative minimum tax and doubling the estate tax exemption. These tax law changes are temporary and will phase out with many tax provisions reverting back to 2017 levels after 2025.
“SECURE” – Setting Every Community Up for Retirement Enhancement Act was signed into law by President Donald Trump in December 2019 made changes to retirement plans including raising the minimum age for required minimum distributions to 72 years of age; allowing workers to contribute to traditional IRAs after turning 70.5 years of age; allowing individuals to use 529 plan money to repay student loans; eliminating the so-called stretch IRA by requiring non-spouse beneficiaries of inherited IRAs to withdraw and pay taxes on all distributions from inherited accounts within 10 years.
“CARES” – Coronavirus Aid, Relief, and Economic Security Act in March 2020 – is a $2.2 trillion economic stimulus bill passed by the 116th U.S. Congress and signed into law by President Donald Trump in March 2020 as an economic stimulus packages related to the COVID-19 pandemic. Provisions included $300 billion in one-time cash payments to individual taxpayers, $260 billion in increased unemployment benefits, $1.02 trillion (initial $350 billion + subsequent $669 billion addition) for the Paycheck Protection Program forgivable loans to small businesses, $500 billion in loans for corporations, and $339.8 billion to state and local governments.
“ARPA” – American Rescue Plan Act of 2021 (also called the COVID-19 Stimulus Package) is a $1.9 trillion economic stimulus bill passed by the 117th United States Congress and signed into law by President Joe Biden in March 2021, to speed up the country’s recovery from the economic and health effects of the COVID-19 pandemic and the ongoing recession.
“IIJA” – Infrastructure Investment and Jobs Act (also known as the Bipartisan Infrastructure Bill) is a $1.2 trillion bill enacted by the 117th US Congress and signed into law by President Joe Biden in November 2021. Provisions primarily include infrastructure investment funding for transportation, broadband, clean water and energy renewal. There were a few income tax related provisions including the elimination of the 4th quarter 2021 for the Employee Retention Credit, and the inclusion of “digital assets” (ie- Bitcoin) to be treated as cash under existing law. Digital asset provision will take effect for returns and filings after December 31, 2023.
“IRA” – Inflation Reduction Act of 2022 signed into law in August, 2022. – includes many tax provisions affecting individuals and businesses. Some of the provisions will impact 2022 returns, however most become effective in 2023 or later.
SUMMARY: These changes are summarized below as they relate to 2022.
Tax Rates & Tax Brackets –
The income tax brackets applicable for 2022 are as follows (along with the 2017 rates that will be effective after 2025):
The brackets are now to be adjusted for inflation. Where the new brackets are currently lower than the previous brackets, annual inflation adjustments could eventually make them higher.
Family Tax Credits –
Child credit was temporarily increased to $3,000 per child for 2021, but are moved back to $2,000 for children under age 17. The refundable portion of these credits is limited to $1,400 each. These credits will phaseout based on the level of income.
There is also a new credit of $500 each for other qualifying dependents; ie- older children or elderly parents. These new credits are not refundable of the tax credit totals exceed your tax liability.
Personal Exemptions –
No more personal exemptions (suspended for 2018–2025). Taxpayers could claim a personal exemption of $4,050 in 2017 for themselves and each dependents.
Standard Deductions –
A taxpayer can either itemize deductions or take a standard deduction based on their filing status. The new standard deduction amounts increased for 2022 to $12,950 (single), $19,400 (heads of household), and $25,900 (joint).
You get to take the larger of the standard deduction or your itemized deduction. This new higher standard deduction will help many, and maybe even alleviate the removal of the exemption deductions, but may not help taxpayers with larger itemized deductions at all.
Itemized deductions –
As mentioned above, you get to take the larger of the standard deduction or your itemized deduction. Not only is the new standard deduction higher, the new tax law has limited or suspended many of the itemized deductions you may be used to getting.
- State and Local Tax Deduction –
This deduction is limited to $10,000 and includes state and local property taxes, income or sales taxes.
If you own a flow-through-entity (“FTE”) business, ie- S-corporation, LLC or Partnership, many states have adopted SALT Cap Workaround legislation (Link to article).
- Mortgage Interest Deduction –
Mortgage interest expense is limited to interest on mortgage debt of up to $750,000 ($1 million if debt incurred before December 15, 2017). Interest on other debt tied to your home (ie- home equity line-of-credit) is no longer deductible unless the proceeds were used for home improvement and the additional indebtedness is under the $750,000 limit.
- Medical expense deduction –
Qualified medical expenses are deductible only to the extent they exceed the 7.5% of AGI.
- 2% Miscellaneous Itemized Deductions –
Deduction suspended 2018-2025. None for 2022! The old law allowed a miscellaneous itemized deduction for certain expenses to the extent they exceeded 2% of AGI. Examples of these deductions were certain professional fees, investment expenses and unreimbursed employee business expenses.
- Personal Casualty & Theft Loss Deductions –
Deduction suspended 2018-2025. None for 2022! This deduction is also suspended except for losses due to an event officially declared a disaster by the President.
- Charitable Contribution Deductions –
The limit on the deduction for cash donations to public charities is raised to 60% of AGI (previously 50%). The deductions for payments made in exchange for college athletic event seating rights have been eliminated. Changes effective 2018-2025.
Required minimum distributions (“RMD”) from retirement plans can be paid directly to qualified charitable organizations, reducing income and having the same effect on your tax return as taking the charitable gift as a deduction.
- Itemized Deductions Phaseout –
Phaseout suspended 2018-2025. The limitation of itemized deductions based on income level has been eliminated.
Alternative Minimum Tax (“AMT”) –
The Alternative Minimum Tax is a separate tax computation that limits or disallows certain “preference” deductions and assesses an additional tax if this alternative computation reaches predetermined levels. It’s purpose was to limit the extent that taxpayers could take advantage of these preference tax items. In reality, more and more taxpayers have found themselves subject to AMT over and above the original intention of the AMT provision.
The new law reduces the number of taxpayers who will be subject to AMT in two ways. The first is an increase in the the AMT exemption amount to $75,900 (single and head-of-household) and $118,100 (married). The second is to increase the AMT exemption phaseout thresholds to $539,900 (single and head-of-household) and $1,079,800 (married). These amounts are subject to an annual inflation adjustment. Changes effective 2018-2025.
Energy Credit –
The IRA of 2022 has been increased the residential energy efficient property credit to 30% through 2032. Starting in 2023, the credit may be claimed for qualifying battery storage technology with a capacity of at least 3 kilowatt hours. (The residential energy efficient property credit was set at 26% for 2022, 22% for 2023, and then phase out altogether after 2023.)
The Residential Energy Efficiency Property Credit is available for solar, wind, and geothermal equipment in both your principal residence and a second home.
The credit is also available for fuel-cell equipment, but only if installed in your principal residence.
Electric Vehciles –
The clean vehicle credit remains at the maximum credit of $7,500 and runs through 2032.
IRA of 2022 has revamped the credit in several ways beginning in 2023:
- The 200,000-vehicle cap for manufacturers has been eliminated. Auto manufacturers that achieved sales threshold may be creditable in 2023 (subject to the other rules ).
- To qualify for the credit, final assembly must occur in North America.
- Only vehicles with a purchase price of $80,000 or less for SUVs and vans, or $55,000 for other vehicles, qualify for the credit.
- There will be an income cap on purchasers: modified adjusted gross income (MAGI) of no more than $300,000 for married filing jointly and qualifying widows; $225,000 for heads of households; and $150,000 for all other filers.
Adoption Credit & Expense –
The adoption credit that can be taken on qualified expenses increased to $14,890 for 2022. If the adoption is considered special-needs, the full credit is available even actual costs are less. The credit phases out for tax payers with modified AGIs beginning at $223,410.
Beginning in 2020, the 2019 SECURE Act states that withdrawals from IRA and/or 401(k)s retirement accounts for the purpose of paying adoption expenses(up to $5,000) are exempt from the 10% early withdrawal penalty.
Moving Expense –
Deduction suspended 2018-2025. No more moving expense deduction, except for military ordered moves for active-duty members of the Armed Forces. This deduction has been a “above-the-line” deduction in computing AGI.
Exclusion suspended 2018-2025. Related, reimbursement for qualified moving expenses can no longer be excluded from gross income and wages, except for military ordered moves for active-duty members of the Armed Forces.
Alimony Payments –
Alimony payments for divorce agreements executed in or after 2019 are no longer deductible. This deduction is another “above-the-line” deduction in computing AGI. This deduction suspension is permanent.
These alimony payments will also now longer be taxable income to the recipient. This change is also permanent.
Alimony payments related to agreements executed before 2019 will follow the prior tax law (taxable to recipient, deductible by payer) unless the agreement is modified and expressly states the repeal of the deduction for alimony payments.
Retirement Accounts and RMDs –
The age for Required Minimum Distributions (“RMD”s) from 70½ to 72 effective in 2020.
The 2019 SECURE Act allows tax payers to contribute to traditional IRAs past the age of 72.
Required minimum distributions (“RMD”) can be paid directly to qualified charitable organizations, reducing income and having the same effect on your tax return as taking the charitable gift as a deduction.
Withdrawals are allowed from IRA and/or 401(k)s retirement accounts for the purpose of paying adoption expenses(up to $5,000) exempt from the 10% early withdrawal penalty. These withdrawals are still subject to income tax.
Roth IRA Conversions –
Taxpayers who convert a pretax traditional IRA into a post-tax Roth IRA from later can no longer change their minds and reverse the conversion (called “recharacterization”). Recharacterization within designated time periods are till allowed for other retirement contributions.
529 Education Savings Plans –
529 Education Plan distributions used to pay qualifying college education expenses (tax-free if distributed per guidelines). The 2017 TCJA tax law expanded the education expenses that qualify to to include both primary and secondary school expenses. There are annual limits to the amount that can be distributed to these new qualified education expenses.
Beginning in 2020, 529 education savings distribution can be used for fees, books, supplies and equipment for certain apprenticeship programs. Also new in 2020, these distributions can be used to pay off up to $10,000 in student loans. Note that this $10,000 limit is a total limit (not an annual limit).
Obama Care Mandate –
Beginning in 2019, you no longer have to pay a penalty if you are not covered by a qualifying health plan as set forth under the Affordable Care Act (“Obamacare”).
Estate Tax Exemption –
The top Federal gift and estate tax rate remains at 40%. The Federal gift and estate tax exemption and the generation-skipping transfer (GST) tax exemption amounts increase to an inflation-adjusted $12.06 million (single) or $24.12 million (married couples). Changes effective 2018-2025.
The 2022 gift tax exclusion is $16,000 per recipient, scheduled to increase to $17,000 per recipient for 2023. Gifting of assets with fair market value totaling greater than this limit requires the filing of a gift tax return.
The top corporate income tax rate is now 21% (compared to the previous top rate of 35%).
Personal service c-corporations (PSCs) now pay a flat 21% rate.
Corporate Alternative Minimum Tax (“AMT”) has been repealed. Existing AMT credits that were allowed under prior law can be carried-over for potential use in tax years 2018–2021.
Deduction for corporate dividends is reduced. C-corporations that own at least 20% of the stock of another corporation will get a 65% deduction (previously 80%), and a 50% deduction (previously 70%) for other corporate dividends received.
Qualified Business Income (“QBI”) Deduction (Section 199A) –
New business deduction based on owner’s Qualified Business Income (“QBI”) generally equal to 20% of QBI. The deduction is subject to restrictions on the type of income and also the taxpayer’s income level.
QBI would include the net amount of qualified items of income, gain, deduction and loss from any qualified business of the noncorporate (C-corporations) owner. It does not include certain investment items, reasonable compensation paid to an owner for services rendered to the business or any guaranteed payments to a partner or LLC member treated as a partner for services rendered to the partnership or LLC.
Owners qualifying for the QBI deduction are individuals, estates and trusts that own the business interest. The QBI deduction reduces the owner’s taxable income. It is not an AGI adjustment item.
W-2 wage limitation: For pass-through entities other than sole proprietorships, the QBI deduction generally can’t exceed the greater of the owner’s share of:
50% of the amount of W-2 wages paid to employees by the qualified business during the tax year, or
The sum of 25% of W-2 wages plus 2.5% of the cost of qualified property. Qualified property is the depreciable tangible property (including real estate) owned by a qualified business as of year end and used by the business at any point during the tax year for the production of qualified business income.
Under an exception, the W-2 wage limitation doesn’t apply until an individual owner’s taxable income exceeds $163,300 ($326,600 for joint filers). Above those income levels, the W-2 wage limitation is phased in over a $50,000 range ($100,000 range for joint filers).
Service business limitation: The QBI deduction generally isn’t available for income from specified service businesses (such as most professional practices other than engineering and architecture and businesses that involve investment-type services such as brokerage and investment advisory services). Under an exception, the service business limitation doesn’t apply until an individual owner’s taxable income exceeds $163,300 ($326,600 for joint filers). Above those income levels, the service business limitation is phased in over a $50,000 phase-in range ($100,000 range for joint filers).
Business Interest Expense Deductions –
Business can only deduct interest expenses in excess of 30% of “adjusted taxable income.” For S corporations, partnerships and LLCs that are treated as partnerships for tax purposes, this limit is applied at the entity level rather than at the owner level.
For tax years beginning in 2018 through 2021, adjusted taxable income is calculated by adding back allowable deductions for depreciation, amortization and depletion. After that, these amounts aren’t added back in calculating adjusted taxable income.
Business interest expense that’s disallowed under this limitation is treated as business interest arising in the following taxable year. Amounts that cannot be deducted in the current year can generally be carried forward indefinitely.
Taxpayers (other than tax shelters) with average annual gross receipts of $25 million or less for the three previous tax years are exempt from the interest deduction limitation. Some other taxpayers are also exempt.
For example, real property businesses can elect to continue to fully deduct their interest, but then would be required to use the alternative depreciation system for real property used in the business. Interest expense from dealer floor-plan financing (for example, financing by dealers to acquire motor vehicles, boats or farm machinery that will be sold or leased to customers) is also still fully deductible.
Bonus Depreciation –
First-year bonus depreciation percentage is currently 100% (previously 50%). It is now allowed for both new and used qualifying property (previously just new property).
Some business may not be eligible for bonus depreciation: ie- real estate businesses that elect to deduct 100% of their business interest and dealerships with floor-plan financing if they have average annual gross receipts of more than $25 million for the three previous tax years.
In later years, bonus depreciation is scheduled to be reduced as follows:
80% for property placed in service in 2023,
60% for property placed in service in 2024,
40% for property placed in service in 2025, and
20% for property placed in service in 2026.
For certain property with longer production periods, the preceding reductions are delayed by one year.
Section 179 Deduction –
Eligible property has been expanded to include certain depreciable tangible personal property used predominantly to furnish lodging.
The definition of qualified real property eligible for the Sec. 179 deduction is also expanded to include the following improvements to nonresidential real property: roofs, HVAC equipment, fire protection and alarm systems, and security systems.
Business Passenger Vehicles Expense Deduction –
For new or used passenger vehicles that are placed in service in or after 2018 and used more than 50% for business, the maximum annual depreciation deductions under the new tax law are summarized as follows:
Year 1 $10,000
Year 2 $16,000
Year 3 $ 9,600 and
Year 4 $ 5,760 and thereafter until the vehicle is fully depreciated.
For years after 2018, these amounts will be adjusted for inflation.
The maximum amount that can be deducted in Year 1 are lower under the new tax law, but the vehicle is depreciated over a shorter period.
Meals & Entertainment & Transportation Expense Deduction –
Business-related entertainment expenses are no longer deductible (previously 50% deductible).
Meal expenses incurred while traveling on business are still 50% deductible.
On-Premise Meals Expense Deduction –
The 50% disallowance rule for meals will now also apply to meals provided via an on-premises cafeteria or otherwise on the employer’s premises for the convenience of the employer (previously 100% deductible). After 2025, these expenses will be no longer be deductible.
Meals & Entertainment & Transportation Expense Deduction –
The new law also disallows employer deductions for the cost of providing commuting transportation to an employee (such as hiring a car service), unless the transportation is necessary for the employee’s safety. It also eliminates employer deductions for the cost of providing qualified employee transportation fringe benefits (ie- parking allowances, mass transit passes and van pooling), but those benefits are still tax-free to recipient employees.
Domestic Production Activities (“DPA”) Deduction (old Section 199) –
The Section 199 “DPA” deduction has been eliminated.
Net Operating Losses (“NOL”s) –
The maximum amount of taxable income that can be offset with NOL deductions is generally reduced from 100% to 80%. In addition, NOLs incurred in those years can no longer be carried back to an earlier tax year (except for certain farming losses). Affected NOLs can be carried forward indefinitely.
A new limitation applies to deductions for “excess business losses” incurred by noncorporate taxpayers. Losses that are disallowed under this rule are carried forward to later tax years and can then be deducted under the rules that apply to NOLs. This new limit kicks in after applying the passive activity loss rules. However, it applies to an individual taxpayer only if the excess business loss exceeds the applicable threshold.
Cash Basis vs Accrual Basis Accounting –
The eligibility rules to use the more-flexible cash method of accounting are liberalized to make them available to many more medium-size businesses. Also, eligible businesses are excused from the chore of doing inventory accounting for tax purposes.
Section 1031 “Like-Kind” Property Exchanges –
The Section 1031 rules that allow tax-deferred exchanges of appreciated like-kind property is allowed only for real estate exchanges completed after December 31, 2017. Beginning in 2018, there are no more like-kind exchanges for personal property assets.
Executive Compensation Expense Deduction –
Compensation deductions for amounts paid to principal executive officers generally cannot exceed $1 million per year, subject to a transition rule for amounts paid under binding contracts that were in effect as of November 2, 2017.
Research and Development (“R&D”) Expenses –
Specified research and development (R&D) expenses must be capitalized and amortized over five years, or 15 years if the R&D is conducted outside the United States instead of being deducted currently. This goes into effect for tax years beginning after December 31, 2021.
Foreign Business Income –
The new tax law includes many changes related to foreign business operations. In conjunction with the reduced corporate tax rate, the changes are intended to encourage multinational companies to conduct more operations in the United States, with the resulting increased investments and job creation in this country.
Developing Strategies and a Specific Plan to fit Your Situation: While uncertainties exist, there remain many solid planning opportunities and we encourage you to schedule an appointment so that we can discuss your situation with you and develop a specific strategy for you.
Circular 230 Disclosure: This is to advise you that, unless expressly stated, nothing in this communication (including any attachment or other accompanying materials) was intended or written to be used, and it cannot be used by any taxpayer, for the purpose of avoiding any federal tax penalties, or for promoting, marketing, or recommending a partnership or other entity, investment plan or arrangement to anyone.