2022 Year-End Tax Planning for Individuals

The key to any year-end tax planning for individuals is to minimize taxes. This is generally done by either reducing income or increasing deductions. In recent years, the strategy to defer income or accelerate deductions has also been impacted by the possibility of increased tax rates due to proposed legislation. As the end of 2022 approaches, however, the impact of inflation is also a factor to consider.

The IRS recently released the inflation-adjusted tax brackets for 2023 and they reflect the 8% inflation that has been visible in the U.S. economy. As an example, the highest marginal tax bracket of 37% applies to joint filers with taxable income exceeding $647,850 in 2022, and this threshold has increased to $693,750 for 2023. As a result, it’s possible that income deferred until 2023 may be taxed at a lower marginal tax rate due to the impact of the inflation-adjusted 2023 tax brackets on a person’s marginal tax bracket.

Itemized Deductions

Due to several related provisions in the TCJA, generally effective for 2018 through 2025, more individuals claim the standard deduction in lieu of itemizing deductions.  It has also increased the importance of planning the timing of certain itemized deductions for some taxpayers.

For instance, you may want to “bunch” charitable donations in a year you expect to itemize deductions (there is more on charitable deductions below). Similarly, you might adjust the timing of certain medical expenditures to provide the maximum medical deduction. The deduction for those expenses is limited to the excess above 7.5% of your adjusted gross income (AGI). If it is not likely that you will be deducting medical and dental expenses in 2022, you might choose to postpone non-emergency expenses to 2023.

Note that the TCJA made other significant changes to itemized deductions. This includes a $10,000 annual cap on deductions for state and local tax (SALT) payments and suspension of the deduction for casualty and theft losses (except for qualified disaster-area losses).

Tip: The standard deduction for 2022 is generally $12,950 for single filers and $25,900 for joint filers and will be $13,850 and $27,700, respectively, in 2023,

Charitable Donations

If you still expect to itemize deductions in 2022, you may benefit from contributions to qualified charitable organizations made within generous tax law limits.

YEAR-END MOVE: Step up your charitable gift-giving at year-end. As long as you make a donation in 2022, it is deductible on your 2022 return—even if you charge the donation by credit card as late as December 31.

Note that the deduction limit for monetary contributions was increased to 100% of AGI for 2021, but the limit reverted to 60% of AGI for 2022. Nevertheless, this still provides plenty of flexibility for most taxpayers. Any excess may be carried over for up to five years.

Furthermore, if you donate appreciated property held longer than one year (i.e., it would qualify for long-term capital gain treatment if sold), you can generally deduct an amount equal to the property’s fair market value (FMV). The deduction for short-term capital gain property though is limited to your initial cost. Your annual deduction for property donations generally cannot exceed 30% of your AGI. As with monetary contributions, any excess may be carried over for up to five years.

Tip: The CARES Act established a maximum deduction of $300 for charitable donations by non-itemizers in 2020. The special deduction was then extended to 2021 and doubled to $600 for joint filers. As of this writing, however, this tax break is not available in 2022. 

Alternative Minimum Tax

The alternative minimum tax (AMT) calculation features several technical adjustments, inclusion of “tax preference items” and subtraction of an exemption amount (subject to a phase-out). After comparing AMT liability to regular tax liability, you effectively pay the higher of the two.

YEAR-END MOVE: Have your AMT status assessed. If the results warrant it, you may want to shift certain income items to 2023 to reduce AMT liability for 2022. For instance, you might postpone the exercise of incentive stock options (ISOs) that count as tax preference items.

Fortunately, fewer taxpayers are now liable for the AMT, thanks mainly to changes in the TCJA. The 2022 exemption amounts are $75,900 for single filers and $118,100 for joint filers. The AMT rates for single and joint filers for 2022 are 26% on AMT income up to $206,100 ($103,050 if married and filing separately) and 28% on AMT income above this threshold. Note that the top AMT rate is still lower than the top ordinary income tax rate of 37%.

Electric Vehicle Credits

The IRA green lights tax credits for purchasing electric vehicles (EVs) and plug-in hybrids over the next few years. But certain taxpayers will not qualify.

YEAR-END MOVE: Map out your plans accordingly. For example you may prefer to buy a new EV in either 2022 or 2023, or wait until next year if buying a used vehicle.

Notably, the IRA includes the following changes, starting in 2023:

• The credit cannot be claimed by a single filer with a modified adjusted gross income (MAGI) above $150,000 or MAGI of $300,000 for joint filers.
• The credit is not available for most passenger vehicles that cost more than $55,000; $80,000 for vans, sports utility vehicles (SUVs) and pickup trucks.
• The current threshold of 200,000 vehicles sold by a manufacturer is eliminated.

In addition, starting in 2023 the IRA authorizes a credit of up to $4,000 for used vehicles if you are a single filer with an MAGI of no more than $75,000; $150,000 for joint filers. If buying a used vehicle, it must cost $25,000 or less and be at least two years old.

• Tip: The vehicle threshold for manufacturers is eliminated in 2023 but remains in effect in 2022.  Also, for vehicles purchased after August 16^th (whether purchased in 2022 or 2023) the vehicle must be powered by batteries whose materials are sourced from the U.S. or its free trade partners and must be assembled in North America. See link for VIN lookup to determine the location of the specific manufacturing plant for the vehicle: nhtsa.gov/vin-decoder

Residential Energy Credits

The IRA generally enhances the residential energy credits that are currently available to homeowners.

YEAR-END MOVE: Take the new rules into account. This may affect the timing of certain improvements you make to your home.

Under the new law, you may benefit from two types of residential energy credits.

1. The 30% “residential clean energy credit” can generally be claimed for installing solar panels or other equipment to harness renewable energy like wind, geothermal energy and biomass fuel. This credit, which was scheduled to phase out and end after 2023, is preserved at 30% from 2022 through 2032 before phasing out.
2. The 30% “nonbusiness energy property credit” can generally be claimed for up to $1,200 of the cost of installing energy-efficient exterior windows, skylights, exterior doors, water heaters and other qualified items through 2032 before phasing out. For 2022, the credit remains at 10% with a maximum of $500.

Tip: Certain items have annual dollar caps. Contact your professional advisors for more details.

Miscellaneous

• Pay a child’s college tuition for the upcoming semester. The amount paid in 2022 may qualify for one of two higher education credits, subject to phase-outs based on your MAGI. Note: The alternative tuition-and-fees deduction expired after 2020.
• Avoid an estimated tax penalty by qualifying for a safe-harbor exception. Generally, a penalty will not be imposed if you pay 90% of your current year’s tax liability or 100% of your prior year’s tax liability (110% if your AGI exceeded $150,000).
• Empty out flexible spending accounts (FSAs) for healthcare or dependent care expenses if you will forfeit unused funds under the “use-it-or-lose it” rule. However, your employer’s plan may provide a carryover to 2023 of up to $570 of funds or a 2½-month grace period or both.
• Make home improvements that qualify for mortgage interest deductions as acquisition debt. This includes loans made to substantially improve your principal residence or one other home. Note that the TCJA suspended deductions for home equity debt for 2018 through 2025.
• If you own property damaged in a federal disaster area in 2022, you may qualify for quick casualty loss relief by filing an amended 2021 return. The TCJA suspended the deduction for casualty losses for 2018 through 2025 but retained a current deduction for disaster-area losses.

We Are Here to Help

At Maxwell Locke & Ritter, our team members have extensive experience helping individuals with their year-end tax planning needs. Please contact us if you have questions about these updates and how they may affect your situation.