Below please find information and a list of actions that that may help you save tax dollars if you act before year-end. Not all of them may be applicable, but you (or a family member) may benefit from some of them.
Projected 2023 bracket changes
Multiple amounts in the Internal Revenue Code are tied to the Consumer Price Index and modified on an annual basis. After a year of inflationary increases, the IRS have made inflation adjustments for than 60 tax provisions. The highest tax rate remains at 37% with the top bracket for Married filing jointly starting at $693,750 and $578,125 for single filers.
Be Aware of the Alternatie Minimum Tax
The AMT was created to make sure that wealthy taxpayers weren’t abusing loopholes and workarounds to avoid paying tax. To do so, the AMT creates an entirely new way to figure your taxes, limiting certain deductions and other means to reduce your income. The AMT can be reduced by deferring income, contributions to 401(k) or 403(b) plan, giving to charity or moving deductions to a different schedule.
Deferring the Receipt of Income Until 2023
Income is taxed in the year it is received. So, if you expect a higher income in 2022 than 2023 or expect being in the same or a higher tax bracket in 2022, you may benefit by deferring the receipt of income until 2023.
Of course, it may be tough for employees to postpone wage and salary income, but if may be possible to defer a year-end bonus into next year—if it is standard company practice to pay year-end bonuses the following year. Also, if you are self-employed or do freelance or consulting work, you have more flexibility. Delaying billings until late December, for example, can ensure that you won’t receive payment until the next year.
Alternatively, in some situations, the opposite strategy – accelerating income into 2022, may be beneficial for individuals who anticipate being in a higher tax bracket in 2023 than in 2022 or need additional income to take advantage of an offsetting deduction or credit that will not be available in future tax years
Energy Tax Credits
- Residential Clean Energy Credit (formerly the Residential Energy Efficient Property Credit)
- For 2022, a tax credit is available to taxpayers who install certain energy-efficient property. The amount of the credit is 30% of the cost of qualifying property installed in 2022 and is available for property installed on or in newly constructed homes and existing homes.
- Nonbusiness Energy Property Credit (2022) / Energy Efficient Home Improvement Credit (2023)
The nonbusiness energy property credit, which had expired has been reinstated for property installed in 2022 and later.
- However, it may make sense to defer many any energy efficiency improvements until 2023, because beginning in 2023, the amount of the credit will increase and be will be equal to 30% of the costs of all eligible home improvements installed during the year, with no lifetime limit on windows. The $500 lifetime limit will be replaced with a $1,200 annual limit and the credit will be extended through 2032, allowing improvements to be spread out over multiple years. Also, the annual limits for certain other types of improvements will increase.
- Qualified Plug-In Electric Drive Motor Vehicle Credit (2022) / Clean Vehicle Credit (2023)
- As we discussed in our recent newsletter, the Inflation Reduction Act (IRA) made significant changes to rules for electric vehicle (EV) tax credits. Most changes apply for 2023 and beyond, while the tax credit will be available through 2032. The maximum credit allowed for a vehicle is $7,500.
The timing of investment activities can result in significant tax consequences. A key point to keep in mind when planning investment activity in 2022 is the extent to which you may have capital loss carryovers from your 2021 tax return. The following general rules apply for most capital asset transactions in 2022:
- Capital gains on property held for one year or less are taxed at an individual’s ordinary income tax rate.
- Capital gains on property held for more than one year are taxed at more favorable capital gains tax rates, depending on the taxpayer’s regular income tax bracket.
Consider timing the sale of assets to have offsetting capital gains and losses. The market has dropped nearly 33% in 2022, so it might be a good time to harvest losses to offset capital gains that have already occurred or to offset future market gains. Capital losses may be fully deducted against capital gains and offset up to an additional $3,000 of ordinary income ($1,500 for a married individual filing separately).
Net Investment Income Tax (NIIT)
An additional 3.8% tax is levied on certain unearned income of higher income taxpayers. Strategies to reduce this possibility would be to exchange real property through a like-kind exchange to defer recognition of any gain until a future year when income may be lower, or, if planning on selling your principal residence that has a gain over the exempt amounts, postponing the sale until after 2022 if your income will be lower in 2023.
Contribute the maximum to retirement accounts
Try to increase your 401(k) contribution so that you are putting in the maximum amount of money allowed ($20,500 for 2022, $27,000 if you are age 50 or over). If you can’t afford that much, try to contribute at least the amount that will be matched by employer contributions.
Also consider contributing to an IRA.
- Making deductible contributions also reduces your taxable income for the year.
- You can contribute a maximum of $6,000 to an IRA for 2022, plus an extra $1,000 if you are 50 or older.
Check IRA distributions
If you were 72 or older in 2021 you must take an RMD during 2022. 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.
Watch your Flexible Spending Accounts
Flexible spending accounts are fringe benefits which companies offer that let employees put part of their pay into a special account which can then be tapped to pay childcare or medical bills. With year-end approaching, check to see if your employer has adopted a grace period permitted by the IRS, allowing employees to spend 2022 set-aside money as late as March 15, 2023.
Taxpayers must report certain transactions involving cryptocurrency and other digital assets on the appropriate income line or schedule, and also must answer a question on page 1 of the return.
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.
Los Angeles Tax Consideration
Los Angeles Proposition ULA – the proposition was approved and amends the City law to add a tax on the sale or transfer of real property valued over $5 million to fund affordable housing and tenant assistance programs. The City collects a tax on the sale or transfer of property.
The ordinance imposes an additional tax as follows:
- A 4% tax on properties sold or transferred for more than $5 million and
- A 5.5% tax on properties sold or transferred for more than $10 million
We remind you that tax planning should be addressed throughout the year as an integral part of overall financial health. To assist you in this endeavor, we provide monthly newsletters and timely email updates. And of course, we encourage you to contact your DK advisor to discuss the specific issues that impact your tax position.
The above-mentioned items are just some of the year-end steps that can be taken to save taxes. Again, by contacting us, we can tailor a particular plan that will work best for you.