With year-end fast approaching, it's time to consider tax planning moves that may lower taxes for the 2022 tax year — and possibly set you up for tax savings in future years. The good news is that it now appears that there won't be any significant unfavorable federal tax changes that will take effect this year or next year.
Play the Standard Deduction Game The Tax Cuts and Jobs Act (TCJA) doubled the standard deduction amounts. For this year, the standard deduction allowances are as follows:
- $12,950 for single people and married individuals filing separate returns,
- $19,400 for people who use head-of-household filing status, and
- $25,900 for married couples filing jointly.
Slightly higher standard deductions are available to those 65 or older or blind. If your total itemizable deductions for this year will be close to your standard deduction allowance, consider making enough additional expenditures for itemized deduction items between now and year-end to surpass your standard deduction. Those extra expenditures will allow you to itemize and reduce your 2022 federal income tax bill. The 2023 standard deduction allowances will be significantly bigger, thanks to a big inflation adjustment (that hasn't been announced yet). So, you can claim the bigger allowance next year if you don't itemize. The projected standard deductions for 2023:
- $13,850 for single people and married individuals filing separate returns,
- $20,800 for people who use head-of-household filing status, and
- $27,700 for married couples filing jointly.
The most manageable itemizable expense to prepay is your mortgage payment due in January. Accelerating that payment into this year will give you 13 months' worth of itemized home mortgage interest deductions in 2022. Ask your tax advisor to determine whether you're affected by limits on mortgage interest deductions under current law. Next, look at state and local income and property taxes due early next year. Prepaying those bills before year-end can lower this year's federal income tax bill. However, the TCJA limited the amount you can deduct for all state and local taxes to a maximum of $10,000 ($5,000 if you use married filing separate status). However, beware: Prepaying state and local taxes can be unhelpful if you owe the alternative minimum tax (AMT) for this year. Under the AMT rules, no deductions are allowed for state and local taxes. So, prepaying these taxes before year-end may do little or no tax-saving good for people who are subject to the AMT. While the TCJA eased the AMT rules, most people are no longer at risk and take nothing for granted. Check with your tax advisor about possible exposure. Other ways to increase your itemized deductions for 2022 include:
- Make more considerable charitable donations this year and smaller donations next year to compensate, and
- Accelerate elective medical procedures, dental work, and expenditures for vision care if you think you can qualify for a medical expense deduction. You can claim an itemized deduction for medical expenses to the extent they exceed 7.5% of your adjusted gross income (AGI).
Harvest Gains and Losses in Taxable Investment Accounts If you hold investments in taxable brokerage firm accounts, consider the tax-saving advantage of selling appreciated securities that have been held for over 12 months. The federal income tax rate on net long-term capital gains recognized this year is 15% for most individuals, although it can reach 20% at high-income levels. The 3.8% net investment income tax (NIIT) can also kick in at higher income levels. So, the actual federal income tax rate on long-term gains can be 18.8% (15% plus 3.8%) or 23.8% (20% plus 3.8%) for some taxpayers. If you're holding some losing investments — that are currently worth less than you paid— consider selling them between now and year-end to trigger the resulting capital losses. This year-end tax-saving strategy is called harvesting capital losses. Harvested losses can shelter capital gains recognized this year. Sheltering short-term capital gains with harvested capital losses is an especially tax-smart move because net short-term gains are taxed at higher federal income tax rates that can reach 40.8% (37% plus the 3.8% NIIT) for high-income taxpayers. If selling some losing investments would cause your 2022 capital losses to exceed your 2022 capital gains, the result would be a net capital loss for the year. It can be used to shelter up to $3,000 of 2022 higher-taxed income from salaries, bonuses, self-employment income, interest income, and royalties ($1,500 for married individuals filing separately). Any excess net capital loss can be carried forward indefinitely. A capital loss carryover can be used to shelter short- and long-term gains recognized in future tax years. This can give you extra investing flexibility in the future because you won't have to hold appreciated securities for over a year to get a lower tax rate. You'll pay 0% to the extent you can shelter gains with your loss carryover. Capital loss carryovers into 2023 and beyond could be even more valuable if your tax rates go up after this year.
Important: If you sold a home earlier this year for a taxable gain, as many homeowners did to take advantage of peak prices, you can offset some or all of that taxable gain with harvested capital losses from selling losing securities.
Give to Charity You can make gifts to your favorite charities in conjunction with an overall revamping of your investments in taxable brokerage firm accounts. But there are two tax-smart principles to keep in mind.
- Don't give away investments that are currently worth lessthan what you paid for them. Instead, sell the shares and book the resulting tax-saving capital loss. Then, you can give the cash sales proceeds to charity — plus, if you itemize, you can claim the resulting tax-saving charitable write-offs.
- Donate investments in appreciatedsecurities directly to the charity. Why? Because, if you itemize, donations of publicly traded shares that you've owned for over a year result in charitable deductions equal to the total current market value of the shares at the time of the gift. Plus, when you donate appreciated shares, you escape any capital gains taxes on those shares. Meanwhile, the tax-exempt charitable organization can sell donated shares without owing any federal income tax.
Give to Loved Ones The principles for tax-smart gifts to charities also apply to gifts to relatives. You should sell losing investments and collect the resulting tax-saving capital losses. Then give the cash proceeds to loved ones. On the other hand, give appreciated shares directly to relatives. When they sell the shares, they'll probably pay a lower tax rate than you would.
Make Charitable Donations from Your IRA IRA owners and beneficiaries who have reached age 70½ are permitted to make cash donations totaling up to $100,000 annually to IRS-approved public charities directly out of their IRAs. You don't owe income tax on these qualified charitable distributions (QCDs), but you don't receive an itemized charitable contribution deduction. The upside is that the tax-free treatment of QCDs equates to an immediate 100% federal income tax deduction without worrying about restrictions that can potentially delay itemized charitable write-offs. Contact your tax advisor if you want to hear about the full benefits of QCDs. Suppose you're interested in taking advantage of this strategy for 2022. In that case, you'll need to arrange with your IRA trustee or custodian for money to be paid out to one or more qualifying charities before the year-end.
Prepay College Bills If paid for you, your spouse or a dependent, higher education expenses may qualify you for one of the following tax credits:
The American Opportunity credit equals 100% of the first $2,000 of qualified postsecondary education expenses, plus 25% of the next $2,000. So, the maximum annual credit is $2,500 per eligible student.
The Lifetime Learning credit equals 20% of up to $10,000 of qualified education expenses. The maximum credit is $2,000 per family. Numerous rules and restrictions apply to these higher education credits. If you're eligible for either credit, consider prepaying college tuition bills that aren't due until early 2023 if it would result in a more significant credit this year.
Go Green The Inflation Reduction Act of 2022 (IRA) provides some tax incentives for you to make energy-efficient improvements to your home, such as solar panels, energy-efficient water heaters, heat pumps, and HVAC systems. The new law also extends increases and modifies a tax credit for new home construction that meets specific requirements. These provisions go into effect after December 31, 2022. So, you might need to delay certain purchases until the 2023 tax year to take advantage of any tax-saving opportunities. Contact your tax advisor for guidance. Also, the IRA provides tax credits for buying certain "green" vehicles if you're in the market for a new or used vehicle. Under the IRA, starting on January 1, 2022, the plug-in vehicle credit will be called the "clean vehicle credit," and the manufacturer limitation on the number of vehicles eligible for the credit will be eliminated.
Important: The IRA changes how the clean vehicle credit is calculated. Specifically, a vehicle must meet critical mineral component and battery requirements, plus the vehicle's final assembly must take place in North America. There are also price and income limitations. Starting in 2023, this credit isn't available to taxpayers with MAGI over:
- $150,000 for single people,
- $300,000 for married couples filing jointly, or
- $225,000 for heads of households.
If you have income above these levels and you're contemplating a clean vehicle purchase, consider doing it before year end to qualify for the credit — but make sure that the vehicle you choose meets the qualifications and isn't made by a manufacturer already reached the 200,000-vehicle sales cap. In addition, starting in 2023, used vehicles may qualify for a lesser federal tax credit if they meet certain requirements. The credit for used green vehicles isn't available if the lesser of your MAGI for the year of the purchase or the preceding year exceeds:
- $75,000 for single people,
- $150,000 for married couples filing jointly, or
- $112,500 for heads of households.
Unlike the credit for new cars, no requirements regarding final assembly or materials and components sourcing apply. Additional limitations do apply. For example, you generally can't claim the credit more often than every three years.
Contact Your Tax Pro Consult a Reynolds + Rowella tax advisor to discuss these and other federal (and state) tax planning moves that may apply to your situation for 2022.
Reynolds + Rowella is a regional accounting and consulting firm known for a team approach to financial problem solving. As Certified Public Accountants, our partners foster a personal touch with our clients. As members of DFK International/USA, an association of accountants and advisors, our professional network is international, yet many of our clients have known us for years through the local communities we serve. Our mission is to operate as a financial services firm of outstanding quality. Our efforts are directed at serving our clients in the most efficient and responsive manner possible, delivering services that exceed the expectations of those we serve. The firm has offices at 90 Grove St., Ridgefield, Conn., and 51 Locust Ave., New Canaan, Conn. For more information, please contact Elizabeth Bresnan at 203.438.0161 or email.
