Posted by Jamie Studer and Alane Boffa
The 2021 tax year saw many of the same regulations extended from 2020. However, things are different this year. Regulations governing 2022 will resemble those more in line with pre-pandemic times, as many of the provisions from the CARES Act of 2020 expired at the end of last calendar year.
So, in addition to a handful of benefits for individuals introduced by the Inflation Reduction Act of 2022, you will likely rely on the Tax Cuts and Jobs Act (TCJA) of 2017 and Setting Every Community Up for Retirement Enhancement Act (SECURE Act) of 2019 as the basis for your year-end tax planning strategies.
Key areas for high-net-worth individuals to focus on include:
- Clean Vehicle Tax Credit
- Child Tax Credit adjustments
- Charitable contributions
- Retirement planning benefits
- Qualified Opportunity Zone Program
Below are our top 10 overall planning ideas to talk with your tax adviser about before year-end.
1. Clean Vehicle Tax Credit
The Inflation Reduction Act passed in August 2022 is the largest investment in climate and energy in American history to date. With much of the legislation focused on advancing clean energy manufacturing, there are also multiple new tax credits aimed to incentivize taxpayers to invest in eco-friendly vehicles.
The Clean Vehicle Tax Credit offers a nonrefundable tax credit up to $7,500 to taxpayers who purchase a vehicle that meets certain manufacturing and price requirements. The credit is divided into two different components: $3,750 for vehicles meeting critical minerals requirements and $3,750 for vehicles meeting battery requirements. Additionally, the final assembly of the vehicle must occur within North America. The Department of Energy has provided a list of vehicles that may qualify for the credit.
2. Retirement Planning
The guidance on retirement planning isn’t largely different from last year, outside of adjustments to contribution limits and income phase-out thresholds adjusted for inflation. Still, retirement planning is always a great place to look to maximize tax benefits.
As always you can maximize your retirement contributions by contributing pre-tax dollars; this will lower your overall taxable income. The limits for this year are:
- If you are under age 50 you can contribute up to $20,500/year to your 401(k) plan.
- If you are age 50 or older you can contribute up to $27,000/year.
- The 2022 traditional and ROTH IRA contribution limits are $6,000 for individuals under 50 and $7,000 for those 50 years of age or older (although the amount you can contribute to a ROTH is reduced at higher incomes).
- Self-employed persons contributing to a solo 401(k) can contribute up to $61,000.
The SECURE Act also tells us that:
- If you turned 70 by July 1, 2019, you are not required to withdraw your required minimum distributions (RMDs) from your IRA until age 72.
- Individuals with traditional and ROTH IRAs can make regular contributions to their plans due to the removal of the 70 ½ age limit.
- A 10-year time limit was placed on distributions from an inherited IRA account.
- Make sure if you are required to take RMDs that you do so in 2022.
View our presentation on the SECURE Act’s impact on retirement planning.
You may also want to consider a ROTH conversion. Instead of paying the tax on your pre-tax retirement account when you withdraw funds, this planning idea allows you to convert a traditional IRA to a ROTH IRA and pay the tax on your retirement income upon conversion. Even though tax rates are scheduled to revert to pre-2018 levels after 2025, such tax rate changes could come sooner should a new law be passed.
3. Taxes & Children
When it comes to children and how they affect your taxes, this year the biggest change is surrounding the child tax credit. However, kiddie tax rules still impact high-net-worth taxpayers and are important to consider.
Kiddie Tax Rules
The kiddie tax rules remain unchanged this year. Children under the age of 19 and college students under the age of 24 with unearned income of more than $2,300 will be taxed at their parents’ rate. If children only have interest and dividend income of $11,000 or less, the parent may be able to elect to include that income on their return rather than filing a child’s return.
Child Tax Credit
In 2021, the American Rescue Plan expanded the child tax credit to the fully refundable amounts of $3,600 per qualifying child under age six and to $3,000 per qualifying child from ages six to 17. These expanded changes expired at the end of 2021. In 2022, taxpayers will only be able to claim a maximum of $2,000 for the child tax credit. The credit will now only be refundable up to $1,500. Income thresholds for phasing out of the credit have increased from $75,000 modified adjusted gross income for single taxpayers in 2021 to $200,000 in 2022 and up to $400,000 for married filing jointly (up from $150,000).
In addition, in 2022 you could no longer make advanced payments for the child tax credit. Instead, if you qualify, you will receive the benefit from this credit when you file your 2022 tax return.
4. Charitable Contributions & Donor Advised Funds
Charitable contributions remain an impactful method of reducing taxable income. Due to changes in the law over the past several years, you may need to carefully plan the timing of your donations to secure the maximum tax deduction.
Cash and Non-Cash Charitable Contributions
The CARES Act extension on the deductibility of cash charitable contributions up to 100% of the taxpayer’s adjusted gross income (AGI) expired as of 2022. For the 2022 tax year, cash charitable contributions will revert back to 60% of AGI.
Unfortunately, for those taxpayers who take the standard deduction, there is no longer a $600 maximum “above-the-line” deduction allowed for married filing jointly taxpayers or $300 deduction for single taxpayers in 2022.
Donor Advised Funds
If you itemize as a result of your charitable contributions, you may want to determine if it would be beneficial to set up a donor advised fund. This would allow you to make a large, single-year contribution to maximize your tax deduction. This strategy allows you to “bunch” your contributions into one year, where you benefit from itemizing in that year and then take the standard deduction in the other years. You can donate the cash — or, even better, appreciated stock — into a donor advised fund and receive the charitable deduction, then use the funds to donate to a charity at a later time.
Donations from Your IRA
Consider making charitable donations directly from your traditional IRA if you are age 70 ½. These donations are not included in your gross income or as an itemized deduction. Reducing your IRA balance may be more beneficial to do now in the event tax rates increase in the future.
5. Health Accounts
Guidance surrounding health accounts for 2022 is not new, but it is an area to consider in your overall planning.
For Health Savings Accounts (HSAs), the 2022 annual contribution for a family has increased by $100 from $7,200 in 2021 to $7,300 ($3,650 for individual). If you are 55 or older there is an additional $1,000 catch-up contribution you can make. In addition, if you have a Flexible Spending Account (FSA), make sure you monitor the balance in your account. You may lose funds not used by the end of the plan year.
6. Harvesting Capital Gains or Losses
This year’s market was hot for M&A transactions, resulting in some large capital gains for taxpayers. Regardless of the gain or its source, or if you perhaps experienced a loss, analyze the options below to see what’s right for your specific tax situation:
- Consider paying the tax this year in case tax rates increase in the future.
- Work with your financial adviser to harvest capital losses and sell some of your underperforming stocks to offset your gain.
- If you expect to have an overall capital loss, consider generating capital gains to offset your loss. You can then carryforward any capital loss over the $3,000 allowable current year loss to a future year, subject to additional limitations.
7. Net Investment Income (NII) Tax
NIIT remains as an additional tax of 3.8% on the lesser of modified adjusted gross income or net investment income once it exceeds $200,000 for single taxpayers and $250,000 for married filing jointly. Here are some ways to reduce the tax:
- Maximizing retirement plan contributions to reduce your modified adjusted gross income,
- Postponing net capital gains or harvesting losses to offset your gain,
- Contributing to your health savings account,
- Selling property with losses,
- Spreading a large gain over a number of years by using an installment sale,
- Using a Section 1031 exchange to defer gain,
- Donating appreciated securities to a qualified charity, and/or
- Altering the tax characteristics of your investment.
8. Estate Tax Planning
The gift and estate tax and exemptions have been increased for inflation in 2022 to $12,060,000 for individuals and $24,120,000 for married filing jointly. Many taxpayers are no longer subject to the federal estate tax until at least 2026. Here are some items to consider:
- Continue making annual exclusion gifts — you can gift up to $16,000 and $17,000 to any individual for tax years 2022 and 2023, respectively.
- If you are under the exemption amounts, focus on income tax basis planning.
- Make sure all of your estate planning documents are up to date; non-tax-related estate planning remains critical.
9. Qualified Opportunity Zones
The TCJA’s Qualified Opportunity Zone (QOZ) program incentivizes long-term investment in low income and economically distressed communities. It allows you to defer capital gains tax when you invest those gains into QOZ Funds. If you have capital gains from an unrelated party, you have 180 days (or more in certain circumstances) to invest in a QOZ Fund and can defer that gain until 2026 if you meet certain requirements. In addition, if the new QOZ investment is held 10 years or more, any gain on disposal of this investment would be exempt from federal taxes.
Visit our Qualified Opportunity Zone resource page.
10. Pass-Through Entity Taxes
Over the past couple of years, 36 states, including Ohio, have enacted the pass-through entity (PTE) tax in various forms. A PTE tax allows a pass-through business to be taxed at the entity level, alleviating some of the federal tax burden of the state and local tax deduction cap at the owner level.
The PTE tax can be of great benefit to business owners in states that have enacted such a law. However, be aware that no state is the same in their approach to PTE tax, so you must carefully consider each state’s PTE tax and how it may or may not benefit you.
Read “How Your Ohio Pass-Through Business Can Be Taxes as an Entity in 2022”
Additional Items to Consider Before Year-End
- The standard deduction increased to $25,900 for married filing jointly, up from $25,100 in 2021.
- The state and local tax deduction continues to be capped at $10,000, making PTE tax elections discussed above a valuable planning option to consider.
- Section 199A, otherwise known as the Qualified Business Income Deduction (QBID), continues to allow a maximum deduction of 20% of qualified business income from a pass-through entity. Owners of specified service trade or businesses (SSTB) are not eligible for this deduction if their taxable income exceeds a certain threshold. To qualify for this deduction without limitation, an owner’s income will need to fall below the $170,050 phase-out threshold for individuals ($340,100 married filing jointly). Owners of an SSTB become completely phased out at $220,050 ($440,100 for those married filing joint) and are no longer eligible for the deduction.
The sooner you talk with your tax advisers about your specific tax situation and goals, the more prepared you will be for year-end tax planning and heading into 2023. Don’t wait to begin the conversation, as some of these strategies take time to implement, and December 31, 2022, is just around the corner.
Contact Jamie Studer at firstname.lastname@example.org, Alane Boffa at email@example.com or a member of your service team to discuss this topic further.
Cohen & Company is not rendering legal, accounting or other professional advice. Information contained in this post is considered accurate as of the date of publishing. Any action taken based on information in this blog should be taken only after a detailed review of the specific facts, circumstances and current law.