Year-End Tax Planning For Individuals

Pugh CPAs Tax Team

As the 2022 year is concluding, it is time to begin once again thinking about the upcoming tax filing season. This process doesn’t have to be daunting; our tax advisors are here to assist every step of the way. While there are constant changes to tax laws and filing thresholds, especially due to the pandemic, we want to alert you to some of the larger ones occurring for the 2022 tax year. This is by no means an exhaustive list, but some key items to consider for end of year tax planning.

Retirement Contributions and Withdrawals
As December nears, it is a great time to think about retirement contributions and possibly withdrawals. If you are in the process of saving for retirement, think about maximizing your contributions. In 2022, the maximum contributions are $6,000 to an IRA ($7,000 if 50 years or older,) and $20,500 to 401Ks or 403(b)s ($27,000 if 50 years or older.) If you are above the age of 70, be sure to take a timely minimum distribution.

Charitable Deduction
In the 2022 tax year, cash charitable deductions will only be deductible (up to 60% of adjusted gross income) for filers who itemized deductions. There is no longer an allowed charitable deduction for those who use the standard deduction, as we have seen in 2020 and 2021. Charitable deductions are a great way to decrease your tax liability. Please contact our office and we can discuss your specific tax situation and if a charitable deduction could benefit you.

Electric Vehicle Credit
Many taxpayers have heard about the electric vehicle tax credit up to $7,500. However there have been some recent changes regarding the vehicles that qualify for this credit. For example, these changes include that the vehicle must have final assembly in North America. If the vehicle is a van, truck, or SUV the vehicle’s cost is limited to $80,000 ($55,000 for sedans and hatchbacks.) If you are interested in buying an electric vehicle and would like to take advantage of the tax credit, please check this listing from the US Department of Energy to see which vehicles qualify: https://afdc.energy.gov/laws/electric-vehicles-for-tax-credit

Child & Dependent Care Credit
In 2022, there are a few changes to the Child & Dependent Care Credit. This credit is no longer refundable in 2022. It is also limited to 20% - 35% of expenses depending on the household income. Expenses are limited to $3,000 for one child and $6,000 for 2 or more children. If you received this credit in 2021, please note that this credit will not be as significant to your tax liability in 2022. For example, if you have two children and had a household income of $125,000 in 2021, you could have received a refundable tax credit of $8,000. In 2022, using this same example, this credit would likely be limited to $1,200. If you have any questions regarding the change to this credit or if the credit applied to your 2021 tax return, please give us a call.   

Tax Brackets
While the tax rates aren’t changing for 2022, the seven income tax brackets are widening due to inflation. As a result, you could end up in different tax brackets from the 2021 year to 2022. The tax bracket ranges also differ depending on your filing status. While the change in brackets isn’t drastic, it is important to look into while doing your end of year tax planning, especially if you were close to the either end of a bracket in the previous year. The income tax brackets have also been published for the 2023 tax year, which is a useful tool for long term tax planning.

Excess Business Losses
While tax planning and considering how you may offset business income for the 2022 year, it is important to note the excess business loss limitation. Originally introduced in 2017, the TCJA created a provision limiting the deduction allowed from excess business losses. The CARES Act postponed this to years beginning after 2020. For the 2022 year, the threshold amount is $270,000 or $540,000 if married and filing jointly. As a simple example, for 2022 you file single and have $500,000 of gross income and $800,000 of deductions from your retail business. Your excess business loss is $30,000 [$800,000 – ($500,000 + $270,000)] and is carried forward as a net operating loss, or NOL. It is important to note how the EBL limitation applies will vary depending on the type of business you operate and other sources of income you may have. Our tax advisors will be able to help navigate this limitation.

Digital Asset Reporting
Cryptocurrency has been a hot topic in recent years with many unknowns. The IRS has released a draft of the 2022 1040 updated instructions that includes cryptocurrency reporting and expanding the terminology to digital assets. The broader term of digital assets includes NFTs and stablecoins. All taxpayers will now have to answer the question about engaging in a transaction involving a digital asset during the year. If in 2022 you disposed of any digital asset that was held as a capital asset you will use Form 8949 to calculate your gain/loss and report that amount on Schedule D. If you received any digital asset as compensation during the year, you must report the income. While there are still questions about reporting for the new digital asset concept, the IRS is taking steps to give more clear guidance. The 2022 1040 draft instructions include more detail on the different types of transactions involving digital assets.

Estimated Payments
The fourth estimated payment for the 2022 tax year is due by January 17, 2023. As an important reminder, taxes must be paid as income is earned or received during the year. Withholding is a common and easy way to accomplish this, but if the amount of income tax withheld from your salary or pension is not enough, or if you have income from other sources, estimated tax payments may be required. If you don’t pay enough tax by the due date of each of the estimated payment periods, you may be charged a penalty. As we near year end, it is critical to consider any transactions or other sources of income without withholding that occurred. Please consult your tax advisor to determine if a fourth quarter estimate is necessary for you and if so, how much based on your income for the 2022 year.

As always, your Pugh CPAs tax advisor is available to help you wrap up the year in the best possible way.   We're always a phone call or email away...

Happy Thanksgiving Holiday to all!