Your 2022 Year-End Tax Strategy: Act Now to Maximize Savings
Businesses and individuals should take action before the end of 2022 to maximize savings, avoid future tax hikes, and take advantage of opportunities while they’re still here.
2023: Less Savings, More Uncertainty
While many workers will see bigger paychecks in 2023 due to the IRS’ new inflation-adjusted tax brackets, the news isn’t as good for businesses and those with higher incomes.
The Biden Administration has previously proposed increasing the corporate income tax rate from 21% to 28% and increasing taxation on everything from cryptocurrency to real property. Whether any of these policies go into effect depends on congress but based on the midterm election results one thing is certain, tax rates will not be going down in 2023.
Meanwhile, one of 2022’s best savings opportunities will be less valuable in the years to come. Unless congress acts, 100% bonus depreciation will be phased out by 20% for each year following 2022. In 2023, businesses will be able to use bonus depreciation to write-off only 80% of their assets’ value. In 2024, it will drop to 60%.
Businesses and individuals should view the final weeks of 2022 as an opportunity to maximize savings and protect their investments.
Here are some general guidelines for your year-end tax strategy.
Strategies for Businesses + Individuals
Focus on the big picture. When planning your year-end tax savings, develop a strategy that will maximize your savings over both 2022 and Also, weigh your investment considerations and tax savings to develop a strategy that maximizes the total financial benefit for your business.
Consider traditional and “reverse” tax planning. Traditional planning aims to defer taxable income to future years while accelerating deductions by paying bills, purchasing supplies, and paying out bonuses. Reverse planning is the opposite, increasing income recognition in the current year and deferring deductions.
Generally, when business owners and individual filers expect future tax increases, they may use a “reverse” strategy, taking advantage of the current year’s lower taxes while deferring savings to future years, where they can offset higher taxes. That strategy may shift when current tax-savings opportunities are expected to disappear.
Strategies for Individuals
Make the most of your 2022 401(k) and IRA contributions. As usual, you should contribute as much as permitted to these investments each year. Annually, individuals can invest up to $20,500 in a 401(k), plus $6,500 for those 50 and up. In 2022, IRA contributions are capped at $6,000, plus $1,000 for those 50 and up.
Be strategic with your charitable donations. If you need to increase your deduction this year, consider donating the charitable contributions you would normally make over multiple years. To lock in a 2022 deduction, use your bank credit card (or get your checks in the mail) by the end of the year.
If you’re 70 ½ or older, consider making your charitable donations directly from a traditional IRA. Your contribution counts towards your Required Minimal Distribution. At the same time, it is not taxable and does not count towards your Adjusted Gross Income, so it won’t trigger a Medicare premium surcharge.
You can also cull your portfolio and reduce your tax burden by donating shares of stock and other appreciated property. You can usually deduct the property’s full value, and neither you nor the charity has to pay taxes on appreciation. (Note: Never donate assets that have dropped in value. If you do, you will not be able to write-off your losses.)
Take advantage of the annual gift tax exclusion. You can avoid future gift taxes – without having to tap into your lifetime estate and gift tax exemption – by giving smaller amounts of cash to receipts annually.
Each year, you can give up to $16,000 to each recipient without paying a federal gift tax. Your spouse can give the same amount. For example, if you’re married and have children, you and your spouse can give each child up to $32,000 without paying federal tax. This strategy is a good way to reduce the overall tax burden of an inheritance, but you have to stay on top of it year after year.
Move your IRA funds to a Roth IRA. If you expect tax rates to be higher when you enter retirement than they are now, you can reduce your overall tax burden by switching to a Roth. The converted amount will be taxed. However, future earnings are tax-free.
Consider transferring the money in increments over time to distribute the tax owed.
Check your investment portfolio for gains and losses. With projections pointing to a possible recession, now is a good time to sell bad stocks. Since excess capital losses are carried over to future years, you can use this year’s losses to offset both current and future gains, plus up to $3,000 of other income.
Just be careful to avoid the wash-sale rule, which will penalize write-offs if a seller buys similar securities within 30 days of selling.
One more tip: Net gains up to the carryover amount aren’t taxed. If you have carryforwards, cull your capital gains to reduce your total burden.
Strategies for Businesses + Business Owners
Take advantage of generous write-offs while they’re here. As we mentioned above, bonus depreciation is a good savings opportunity, but it’s going to be less valuable in the years to come. (It’s currently set to be reduced from its current cap of 100% by 20% each year following 2022.) Take advantage of the full savings now by deducting the cost of qualifying business assets. Just be aware that those assets must be purchased and put into service before the end of the year.
Expense new or used assets. Organizations can expense up to $1,080,000 of their assets, as long as the assets are put into service during 2022. The amount expensed cannot exceed total taxable income, a rule that does not apply to bonus depreciation.
Invest in vehicles. Under 2022’s tax law, there are lots of breaks for those purchasing business vehicles. That can be especially helpful for transportation, distribution and logistics businesses. Buyers of heavy SUVs can write off the full cost, thanks to bonus depreciation, while up to 100% the cost of a large truck can be expensed. The catch? Vehicles must be purchased and put into service before the end of the year.
Use a pass-through entity to increase your federal itemized deductions. For individuals, there is a $10,000 cap on federal itemized deductions based on state and local taxes. Fortunately, there’s a workaround. Many states, including Illinois, allow pass-through entities to elect to be taxed at the entity level, effectively converting nondeductible state taxes at the individual level into a federal tax deduction.
Before you use this strategy, check for any state tax traps – especially if you are a nonresident owner – that may exceed potential savings.
Consider taking dividends in lieu of a salary. C corp shareholders in higher tax brackets might reduce their burden by taking dividends instead of a regular salary. The benefits are twofold: The owner receives a better tax rate, while the company saves payroll taxes by paying dividends rather than salaries.
There’s one catch. The business must forgo the tax benefit from the salary deduction as dividends are not deductible. However, in the right circumstances, the individual tax savings could outweigh the deduction lost by the corporation.
Take a 20% deduction on pass-through income. If you own an LLC, S corp or other pass-through entity, you can deduct 20% of your qualified business income. Income limitations can apply – $170,500 for individual filers and twice that amount for joint filers. However, if you’re just over that threshold, you may be able to dip below it by accelerating deductions or deferring income to 2023.
Your Business + Individual Finances, Managed by CPAs You Trust
At Dugan + Lopatka, we partner with businesses and owners to identify tax savings opportunities, analyze data, manage wealth, and help our clients make key decisions with confidence.
By partnering with one firm for both your business and personal finances, you can ensure that you are maximizing your total tax savings while positioning yourself for success—in business and life.