With year-end approaching, it is time to start thinking about moves that may help lower your tax bill for this year and next. This year’s planning is more challenging than usual due to recent changes made by the Inflation Reduction Act of 2022 and the potential change in congressional balance of power resulting from the midterm elections.
Whether or not tax increases become effective next year, the standard year-end approach of deferring income and accelerating deductions to minimize taxes will continue to produce the best results for all but the highest income taxpayers, as will the bunching of deductible expenses into this year or next to avoid restrictions and maximize deductions.
If proposed tax increases do pass, however, the highest income taxpayers may find that the opposite strategies produce better results: Pulling income into 2022 to be taxed at currently lower rates, and deferring deductible expenses until 2023, when they can be taken to offset what would be higher-taxed income. This will require careful evaluation of all relevant factors.
I have compiled a list of actions based on current tax rules that may help you save tax dollars if you act before year-end. Not all of them will apply to you, but you may benefit from many of them. We can narrow down specific actions when we meet to tailor a particular plan for you. In the meantime, please review the following list and contact me at your earliest convenience so that we can advise you on which tax-saving moves might be beneficial:
Year-End Planning: Individuals
- Higher-income individuals must be wary of the 3.8% surtax on certain unearned income. The surtax is 3.8% of the lesser of: (1) net investment income (NII), or (2) the excess of MAGI over a threshold amount ($250,000 for joint filers or surviving spouses, $125,000 for a married individual filing a separate return, and $200,000 in any other case).
- As year-end nears, the approach taken to minimize or eliminate the 3.8% surtax will depend on the taxpayer’s estimated MAGI and NII for the year. Some taxpayers should consider ways to minimize (e.g., through deferral) additional NII for the balance of the year, others should try to reduce MAGI other than NII, and some individuals will need to consider ways to minimize both NII and other types of MAGI. An important exception is that NII does not include distributions from IRAs or most other retirement plans.
- The 0.9% additional Medicare tax also may require higher-income earners to take year-end action. It applies to individuals whose employment wages and self-employment income total more than an amount equal to the NIIT thresholds, above. Employers must withhold the additional Medicare tax from wages in excess of $200,000 regardless of filing status or other income. Self- employed persons must take it into account in figuring estimated tax. There could be situations where an employee may need to have more withheld toward the end of the year to cover the tax. This would be the case, for example, if an employee earns less than $200,000 from multiple employers but more than that amount in total. Such an employee would owe the additional Medicare tax, but nothing would have been withheld by any employer.
- 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. If you hold long-term appreciated-in-value assets, consider selling enough of them to generate long-term capital gains that can be sheltered by the 0% rate. The 0% rate generally applies to net long-term capital gain to the extent that, when added to regular taxable income, it is not more than the maximum zero rate amount (e.g., $83,350 for a married couple; estimated to be $89,250 in 2022).
- Postpone income until 2023 and accelerate deductions into 2022 if doing so will enable you to claim larger deductions, credits, and other tax breaks for 2021 that are phased out over varying levels of AGI. These include deductible IRA contributions, child tax credits, higher education tax credits, and deductions for student loan interest. Postponing income also is desirable for taxpayers who anticipate being in a lower tax bracket next year due to changed financial circumstances. Note, however, that in some cases, it may actually pay to accelerate income into 2022.
- If you believe a Roth IRA is better for you than a traditional IRA, consider converting traditional- IRA money invested in any beaten-down stocks (or mutual funds) into a Roth IRA in 2022 if eligible to do so. Keep in mind that the conversion will increase your income for 2022, possibly reducing tax breaks subject to phaseout at higher AGI levels. This may be desirable, however, for those potentially subject to higher tax rates under pending legislation.
- It may be advantageous to try to arrange with your employer to defer, until early 2023, a bonus that may be coming your way. This might cut as well as defer your tax. Again, considerations may be different for the highest income individuals.
- Many taxpayers won’t want to itemize because of the high basic standard deduction amounts that apply for 2022 ($27,700 for joint filers, $13,850 for singles and for marrieds filing separately, $20,800 for heads of household), and because many itemized deductions have been reduced or abolished, including the $10,000 limit on state and local taxes; miscellaneous itemized deductions; and non-disaster related personal casualty losses. You can still itemize medical expenses that exceed 7.5% of your AGI, state and local taxes up to $10,000, your charitable contributions, plus mortgage interest deductions on a restricted amount of debt, but these deductions won’t save taxes unless they total more than your standard deduction.
- Some taxpayers may be able to work around these deduction restrictions by applying a bunching strategy to pull or push discretionary medical expenses and charitable contributions into the year where they will do some tax good. For example, a taxpayer who will be able to itemize deductions this year but not next will benefit by making two years’ worth of charitable contributions this year. The COVID-related increase for 2022 in the income-based charitable deduction limit for cash contributions from 60% to 100% of MAGI assists in this bunching strategy.
- Consider using a credit card to pay deductible expenses before the end of the year. Doing so will increase your 2022 deductions even if you don’t pay your credit card bill until after the end of the year.
- If you expect to owe state and local income taxes when you file your return next year and you will be itemizing in 2022, consider asking your employer to increase withholding of state and local taxes (or make estimated tax payments of state and local taxes) before year-end to pull the deduction of those taxes into 2022. But this strategy is not good to the extent it causes your 2022 state and local tax payments to exceed $10,000.
- Required minimum distributions RMDs from an IRA or 401(k) plan (or other employer-sponsored retirement plan) have not been waived for 2022. If you were 72 or older in 2022 you must take an RMD. Those who turn 72 this year have until April 1 of 2023 to take their first RMD but may want to take it by the end of 2022 to avoid having to double up on RMDs next year.
- If you are age 701⁄2 or older by the end of 2022, and especially if you are unable to itemize your deductions, consider making 2022 charitable donations via qualified charitable distributions from your traditional IRAs. These distributions are made directly to charities from your IRAs, and the amount of the contribution is neither included in your gross income nor deductible on Schedule A, Form 1040. However, you are still entitled to claim the entire standard deduction. (The qualified charitable distribution amount is reduced by any deductible contributions to an IRA made for any year in which you were age 701⁄2 or older, unless it reduced a previous qualified charitable distribution exclusion.)
- Consider increasing the amount you set aside for next year in your employer’s FSA if you set aside too little for this year and anticipate similar medical costs next year.
- If you become eligible in December of 2022 to make HSA contributions, you can make a full year’s worth of deductible HSA contributions for 2022.
- Make gifts sheltered by the annual gift tax exclusion before the end of the year if doing so may save gift and estate taxes. The exclusion applies to gifts of up to $16,000 made in 2022 to each of an unlimited number of individuals. You can’t carry over unused exclusions to another year. These transfers may save family income taxes where income-earning property is given to family members in lower income tax brackets who are not subject to the kiddie tax.
Year-End Planning: Businesses
- Taxpayers other than corporations may be entitled to a deduction of up to 20% of their qualified business income. For 2022, if taxable income exceeds $340,100 for a married couple filing jointly, (about half that for others), the deduction may be limited based on whether the taxpayer is engaged in a service-type trade or business (such as law, accounting, health, or consulting), the amount of W-2 wages paid by the business, and/or the unadjusted basis of qualified property (such as machinery and equipment) held by the business. The limitations are phased in; for example, the phase-in applies to joint filers with taxable income up to $100,000 above the threshold, and to other filers with taxable income up to $50,000 above their threshold.
- Taxpayers may be able to salvage some or all of this deduction, by deferring income or accelerating deductions to keep income under the dollar thresholds (or be subject to a smaller deduction phaseout) for 2022. Depending on their business model, taxpayers also may be able increase the deduction by increasing W-2 wages before year-end. The rules are quite complex, so don’t make a move in this area without consulting us.
- More small businesses are able to use the cash (as opposed to accrual) method of accounting than were allowed to do so in earlier years. To qualify as a small business a taxpayer must, among other things, satisfy a gross receipts test, which is satisfied for 2022 if, during a three-year testing period, average annual gross receipts don’t exceed $27 million (next year this dollar amount is estimated to increase to $29 million). Not that many years ago it was $1 million. Cash method taxpayers may find it a lot easier to shift income, for example by holding off billings till next year or by accelerating expenses, for example, paying bills early or by making certain prepayments.
- Businesses should consider making expenditures that qualify for the liberalized business property expensing option. For tax years beginning in 2022, the Section 179 expensing limit is $1,080,000, and the investment ceiling limit is $2,700,000. Expensing is generally available for most depreciable property (other than buildings) and off-the-shelf computer software. It is also available for interior improvements to a building (but not for its enlargement), elevators or escalators, or the internal structural framework), for roofs, and for HVAC, fire protection, alarm, and security systems.
- The generous dollar ceilings mean that many small and medium sized businesses that make timely purchases will be able to currently deduct most if not all their outlays for machinery and equipment. What’s more, the expensing deduction is not prorated for the time that the asset is in service during the year. So expensing eligible items acquired and placed in service in the last days of 2022, rather than at the beginning of 2023, can result in a full expensing deduction for 2022.
- Businesses also can claim a 100% bonus first year depreciation deduction for machinery and equipment bought used (with some exceptions) or new if purchased and placed in service this year, and for qualified improvement property, described above as related to the expensing deduction. The 100% write-off is permitted without any proration based on the length of time that an asset is in service during the tax year. As a result, the 100% bonus first-year write-off is available even if qualifying assets are in service for only a few days in 2022.
- Businesses may be able to take advantage of the de minimis safe harbor election (also known as the book-tax conformity election) to expense the costs of lower-cost assets and materials and supplies, assuming the costs aren’t required to be capitalized under the UNICAP rules. To qualify for the election, the cost of a unit of property can’t exceed $5,000 if the taxpayer has an applicable financial statement (AFS, e.g., a certified audited financial statement along with an independent CPA’s report). If there’s no AFS, the cost of a unit of property can’t exceed $2,500. Where the UNICAP rules aren’t an issue, and where potentially increasing tax rates for 2023 aren’t a concern, consider purchasing qualifying items before the end of 2022.
- A corporation (other than a large corporation) that anticipates a small net operating loss (NOL) for 2022 (and substantial net income in 2023) may find it worthwhile to accelerate just enough of its 2023 income (or to defer just enough of its 2022 deductions) to create a small amount of net income for 2022. This allows the corporation to base its 2023 estimated tax installments on the relatively small amount of income shown on its 2022 return, rather than having to pay estimated taxes based on 100% of its much larger 2023 taxable income.
- Year-end bonuses can be timed for maximum tax effect by both cash- and accrual-basis employers.
- Cash-basis employers deduct bonuses in the year paid, so they can time the payment for maximum tax effect. Accrual-basis employers deduct bonuses in the accrual year, when all events related to them are established with reasonable certainty. However, the bonus must be paid within 21⁄2 months after the end of the employer’s tax year for the deduction to be allowed in the earlier accrual year.
- Accrual-basis employers looking to defer deductions to a higher-taxed future year should consider changing their bonus plans before year-end to set the payment date later than the 2.5-month window or change the bonus plan’s terms to make the bonus amount not determinable at year end.
- To reduce 2022 taxable income, consider deferring a debt-cancellation event until 2023.
- Sometimes the disposition of a passive activity can be timed to make best use of its freed-up suspended losses. Where reduction of 2022 income is desired, consider disposing of a passive activity before year-end to take the suspended losses against 2022 income. If possible 2023 top rate increases are a concern, holding off on disposing of the activity until 2023 might save more in future taxes.
IRS ANNOUNCES BIG INCREASES TO RETIREMENT SAVINGS LIMITS FOR 2023:
Earlier this month, the IRS announced the cost of living adjustments applicable to the various retirement plan limitations for 2023, with most of these tax advantaged savings opportunities increasing substantially from 2022 limits.
Most working professionals have access to a 401k plan or 403b plan at work. Amounts contributed to these plans generally reduce your taxable earnings and always grow tax deferred. For 2023, you can contribute up to $22.5k into a 401(k) or 403(b) plan through salary deferrals, up from $20.5k in 2022. With the Roth option, you forgo a current year tax break in exchange for a promise from the government that those contributions will grow tax-free.
Anyone 50 or older by December 31, 2023 can contribute an extra $7,500 into their 401(k) or 403(b) plan through salary deferrals next year, for a total annual contribution of $30k, up by $3k from the 2022 max. Please note that you don’t need to actually wait until your 50th birthday to be able to start making these catch-up contributions, so adjust your deferrals as of the first paycheck of that monumental year.
Many smaller employers offer their staff access to SIMPLE/IRAs instead. SIMPLE’s work just like 401(k) plans, which means it’s up to each employee to fund the bulk of his or her retirement savings account through salary deferrals. For 2023, the maximum contribution into your SIMPLE as salary deferrals increases to $15.5k, up $1,500 from last year’s limit of $14k. Anyone 50 or older by December 31st can put away an additional $3.5k in 2023, for a total annual salary deferral of $19k. Your employer will generally make matching contributions into your account of up to 3% of your salary.
And if you are self-employed, you can contribute up to 20% of your net self-employment income into a SEP IRA. The maximum contribution into your SEP IRA for 2023 increases by $5k to
$66k. Solo 401k’s allow self-employed individuals to hit the $66k max on less income and also increase the max for people 50 and over to $73.5k.
And lastly, the maximum salary for many retirement plan calculations jumps to $330k for 2023, up by $25k from the 2022 max of $305k.
Increase to IRAs
Don’t forget about IRA’s. The amount you can contribute to an IRA increases by $500 to $6,500 per person for 2023. Even if you’re covered under a retirement plan at work, you and your spouse can each contribute up to $6,500 into a traditional IRA or Roth IRA next year, as long as your combined wages and net self-employment income exceeds the total amount you both contribute. Anyone 50 or older can contribute an extra $1,000, increasing the total allowable contribution to $7,500. You have until April 15, 2023 to contribute to your IRAs for 2022.
There is a bit of good news for people looking to contribute to a Roth IRA in 2023. The amount you can earn and still contribute to a Roth increases by $9k for single individuals and $14k for joint filers as follows:
- Single Individuals – Phase-out begins $138,000 and ends at $153,000
- Married Couples – Phase-out begins $218,000 and ends at $228,000
If your income is too high for a Roth, don’t forget that the rules changed more than a decade ago, eliminating the income limitation as of 2010 for people looking to convert their IRAs to a Roth IRA. This tax law change provides high-income taxpayers with a great opportunity to get money into these tax-free investment accounts. For more information, please check out our article With Stock Markets Down This Year Consider Converting Retirement Accounts to a Roth IRA.
And finally, if you’re married and your spouse isn’t covered under either an employer sponsored or self-employed retirement plan during the year, the phase-out range for your spouse making a deductible IRA contribution has increased to $218k – $228k for 2023, which is identical to the Roth IRA phase-out limits.
Re-Set Your 2023 Retirement Savings Budget
Most people won’t be able to max out these tax-advantaged retirement options unless they get on a budget and put away a set amount of money each month. With 2022 winding down, now’s the time to start thinking about resetting your monthly retirement savings goals for 2023.
3/31/23 DEADLINE SET FOR MANY PROVIDER RELIEF FUND RECIPIENTS TO SELF-REPORT:
If your practice received a Provider Relief Fund Grant of more than $10k from HRSA, you are required to self-report that you utilized those funds properly. On 10/22/22, the Health Resources and Services Administration (HRSA) issued guidance available at: https://www.hrsa.gov/sites/default/files/hrsa/provider-relief/post-payment-notice-reporting- requirements-october-2022.pdf.
For those practices that received PRFs of more than $10k in aggregate between 7/1/21 and 12/31/21, your self-reporting period starts 1/1/23 and ends 3/31/23. HRSA has already emailed PRF recipients who might be required to self-report during the upcoming Reporting Period of 1/1/23 – 3/31/23.
And don’t forget that the self-reporting period for practices receiving PRFs in excess of $10k between 1/1/22 and 6/30/22 commences on 7/1/23 and ends on 9/30/23.
SOCIAL SECURITY MAX JUMPS TO $160,200 FOR 2023:
Most years, the government bumps up the maximum Social Security taxes that you can pay. For 2023, the maximum wage base jumps to $160,200, an increase of $13,200, or 9.0%, over the max of $147,000 that was in place for 2022.
At a rate of 6.2%, the maximum Social Security taxes that your employer will withhold from your salary is $9,932. This is $818 higher than the 2022 max of $9,114. Employers then match any Social Security taxes withheld from their staff’s salaries.
Higher Medicare Taxes Due To The Affordable Care Act Passed In 2012 (Form 8959 & Form 8960):
Starting back in 2013, the employee portion of the Medicare tax jumps from the current rate of 1.45% to 2.35% on earned income in excess of $200k for single individuals and $250k for married couples filing a joint tax return. As of now, the employer will continue to match their employees’ Medicare taxes at a rate of 1.45%, which means the total marginal Medicare tax will be 3.8% for high-income taxpayers. This tax is reported on the Form 8959.
For example, if you’re single, and earn wages of $500k from your job, expect to pay $2,700 in additional Medicare taxes (($500k – $200k) * .9%) for 2013 and beyond.
To increase taxes for high-income individuals even more, the Medicare tax continues to apply to unearned income. Anyone with income over the $200k or $250k threshold should expect to pay Medicare taxes at a rate of 3.8% on interest, dividends, capital gains, and net rental income (except for when you rent office space you own to your practice) in addition to any federal and state income taxes due on this income. This tax is reported on the Form 8960.
FOREIGN ACCOUNT REPORTING BASICS:
Below is a brief summary of reporting foreign accounts, gifts and inheritances. Please note that the
penalties for non-compliance can be onerous.
If you inherit or receive a gift from a foreign person of more than $100k:
- Complete a Form 3520 (About Form 3520, Annual Return To Report Transactions With Foreign Trusts and Receipt of Certain Foreign Gifts | Internal Revenue Service (irs.gov))
- File the Form 3520 as a Paper tax return
If you have a foreign account open at any time during the calendar year, no matter how low the balance:
- Complete the questions at the bottom of the Schedule B attached to your personal return
- Check the boxes stating that you have a foreign account open, no matter how low the value
If you have foreign accounts open that exceed $10k in any calendar year:
- Complete a Form FIN CEN 114 (Report of Foreign Bank and Financial Accounts (FBAR) | Internal Revenue Service (irs.gov))
- For each foreign account, Include the name of the bank, address, account number and maximum value of each account during the year
- E-file as a separate return.
If you are married filing jointly and have foreign accounts with a combined value of more than $150k
during the year or more than $100k at 12/31, or any other taxpayer with a combined value of more than $75k during the year or more than $50k at 12/31:
- Complete and attach a Form 8938 About Form 8938, Statement of Specified Foreign Financial Assets | Internal Revenue Service (irs.gov))
- File as part of your personal tax return
Changes to Bonus Depreciation Coming Soon
The current 100% bonus depreciation stays in effect until January 1, 2023. At that point, the first-year bonus depreciation deduction decreases as follows:
- 80% for property placed in service during 2023
- 60% for property placed in service during 2024
- 40% for property placed in service during 2025
- 20% for property placed in service during 2026
STARTING TO DREAM ABOUT WHERE TO LIVE FOLLOWING YOUR RETIREMENT?
Do you find yourself daydreaming about your retirement from time to time? For many people, retirement choices often include relocating to a warmer year-round climate. But what about tax considerations? Currently nine states have no state income tax requirements: Alaska, Florida, Nevada, New Hampshire, South Dakota, Tennessee, Texas, Washington, and Wyoming. Some of these states do tax investment income, however.
Before relocating to a “tax-free” state, do your homework first. Remember, states need to generate tax revenues somehow, so it would also be wise to check on the state’s sales tax and property tax rates before making any “tax efficient” relocation decisions. Please also learn how your target states tax Social Security benefits and retirement plan distributions since many states don’t tax those types of income.
Are there any states to possibly avoid? The five states with the highest marginal personal income tax rates are: California (12.3%), Hawaii (11.0%), New York (10.9%), New Jersey (10.75%), and Oregon (9.9%).
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