Preface: “Happiness isn’t something you experience; it’s something you remember.” – Oscar L.
Year-End 2022 Tax Planning
The tax space for the 2022 year is adapted with some new provisional tax law changes that differ somewhat from the prior 2021 tax year. Firstly, several COVID Era tax laws have completely lapsed for taxpayers. Additionally, The Inflation Reduction Act of 2022 introduces a number of new tax law attributes for individuals and businesses. Any further tax proposals or tax changes between now and December 31 are yet obscured. The following are some highlighted features for 2022 tax planning.
Standard Deduction
The standard deduction is inflation adjusted for 2022 for joint filers at $25,900 and individual taxpayers $12,950 and head of households $19,400.
Non-Profit Contributions
The tax provisions for above the line charitable deduction for non-itemizers introduced in 2020 was effective only for tax years 2020 and 2021. Unless modifications are introduced to 2022 tax codes, it is completely phased-out for the 2022 tax year. Therefore, only those itemizing deductions can obtain charitable contribution benefits for taxes in 2022.
Mileage Rates
For tax year 2022, there has been a mid-year change to the applicable standard mileage rate for inflation adjusted vehicle expenses that skyrocketed during the 2022 tax year. Taxpayers will need to sort mileage logs for a bifurcated calculation on effective 2022 mileage rate changes. From January 1 to June 30, the 2022 standard mileage rate for business driving is 58.5¢ per mile. From July 1 to December 31, the 2022 mileage rate for business purposes rises to 62.5¢ per mile.
Gift and Estates Taxes
The annual gift tax exclusion for 2022 increases from $15,000 to $16,000 per taxpayers. So, an individual can give up to $16,000 ($32,000 with spouse) to each child, grandchild or any other taxpayer in 2022 without being required to file a gift tax return. The lifetime estate and gift tax exemption for 2022 increases from $11.700 million to $12.060 million or $24.120 million for couples.
Capital Gain Tax Rates
For 2022, similar to prior years a 0% capital gain tax rate applies for individual taxpayers with up to $41,675 of taxable earnings (joint filers $80,800). A 3.8% surtax on net investment income continues in 2022 for individual taxpayers with taxable income above $200,000 and joint filers above $250,000 of AGI.
Enhanced Child Tax Credit Expired
The enhanced Child Tax Credit legislated into law during the Covid Pandemic in 2020 has also expired for 2022. Although legislators have constructed work to extend the enhanced child tax credit, thus far all efforts have been futile.
Energy Efficient Home Improvement Credit
The Energy Efficient Home Improvement Credit has been extended through 2022. Payments to install qualifying electric, water heating, or temperature control systems for your home that use solar, wind, geothermal, biomass or fuel cell power qualify for an energy credit increased to 30% starting in 2022.
Research and Development Expenditures
The tax benefit for for-profit businesses to currently write off research and development costs from the Tax Cuts and Jobs Act also expired at the end of 2021, Thus for 2022 tax laws will require businesses to amortize these research and development payments. Retroactive tax law amendments are still a possibility.
Educator Deductions
Teachers receive an inflation adjusted above-the-line educator deduction for qualify classroom expenses adjusted to $300 for 2022 or $600 for joint teaching couples. An “eligible educator” is any taxpayers who is a kindergarten through 12th grade teacher, instructor, counselor, principal, or aide in a school for at least 1,000 hours during a school year. Homeschooling educational expenses do not qualify.
IRA Required Minimum Distributions
Revised calculations are now in effect for required minimum distributions in 2022. The 2022 contribution limit for traditional IRAs and Roth IRAs has no changes at $6,000, with a $1,000 additional catch-up contribution for individuals age 50 and up. Taxable income ceilings on Roth IRA contributions increased for contributions phase out in 2022 at adjusted gross incomes (AGIs) of $204,000 to $214,000 for joint filers and $129,000 to $144,000 for individual taxpayers.
Scheduled income phaseouts for traditional IRAs also begin at an increased levels in 2022, from AGIs of $109,000 to $129,000 for couples and $68,000 to $78,000 for single filers. If only one spouse is covered by a plan, the phaseout level for deducting a contribution for the uncovered spouse starts at $204,000 of AGI to $214,000.
Adoption of a Child
For 2022, the adoption credit is available for up to $14,890 of qualified expenses. The full credit is available for a special-needs adoption, even if the adoption costs less. The credit begins to phase out for taxpayers with adjusted AGIs above $223,410 to $263,410.
Student Loan Forgiveness
President Biden’s program to revised student loan forgiveness program will provide non-taxable income for taxes from cancellation of student debt from qualifying loans.
Digital Assets
The draft Form 1040 for 2022 includes an updated question for material ownership of “digital assets” rather than “virtual currency.”
Summary
Further to these tax planning items for the 2022 tax year, the typical year-end tax planning strategies also are applicable including year-end qualifying gifts and qualifying contributions, deferring taxable income and accelerating tax deductions, maximizing qualified retirement contributions, and managing taxable gains and losses from investments.