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