Year End Tax Planning For 2022
(Individual and Business)
As the year draws to a close, it is important to review year-end strategies that might help lower your taxable income and your business’s taxable income for 2022.
The following are some tax breaks from which you may benefit, as well as strategies that can be employed to help minimize taxable income and tax liability for 2022. If you own an S Corp or LLC business, there are additional possible avenues for tax savings as well.
Tax Filing Status You might wonder, “should I file married or separate for tax filing status?”, If you got married or divorced during the year this will be an issue. You may also qualify for head of the household status if you are unmarried and have a dependent child.
Standard Deduction vs Itemized Deductions The standard deductions have increased in 2022, single = $12,950, head household = $19,400, and married joint = $25,900. Many people find it more advantageous to claim standard deduction due to the limitations on state and local taxes of $10k (SALT limitation) as well as the elimination of employee business expenses such as auto and home office.
Retirement Plans Now is the time to make sure to max out your 401k or 403(b) plan at work. The limit is $20,500 plus $6,500 if over 50 yrs old. If you are self-employed consider setting up and contributing to a SEP or Simple plan, the contribution max is $61,000 and the deadline to contribute is 4/15/23.
Health Savings Accounts If you have an HSA the annual maximum contribution amount is single = $3650 and married $7300. If you have an FSA (flex account) make sure to take max advantage of this.
Charitable Contributions Since most people do not itemize their deductions properly making a charitable donation before year-end may yield no tax benefit. However, if you find yourself whereby you plan or intend to make a large donation make sure to get proper documentation verifying. Also, if you are over 70 ½ you are eligible to make a charitable donation directly from your IRA and in this way it will not be counted in your income.
Child Tax Credit (CTC) For 2022 for each child under age 17 a CTC is available of up to $2,000 depending on modified adjusted income. A $500 credit is available for other dependents. Sale of Home If you sold your home this year, up to $250,000 ($500,000 if married) of the gain on the sale is excludible from income. If you rented your home or used any part of the business, you may need to reduce this amount. Any loss is not deductible.
Business Owners If you own or started a business in 2022 you will have several other avenues available for you to reduce taxable income such as:
Deferring Income or Accelerating Deductions If your accounting method is cash basis, delay invoicing until year-end. Accelerate deductions by paying before year-end, remember a credit card is charged and is considered paid when incurred.
Depreciation Expense If you are thinking of major equipment or furniture purchases, plan it before year-end. Remember they must be placed into service, which means received and placed into use. Make sure to maximize depreciation expense and claim either bonus of Sec. 179 depreciation expense.
QBI Deduction If you operate as an LLC or pass-through entity, you may be able to claim a deduction for 20% of the business’s net profit. This deduction is available to S Corporations, LLC partnerships, and LLC’s taxed as disregarded entities. This tax break is subject to some complicated restrictions, so make sure to claim
S Corporation Reasonable Compensation If you are a shareholder/owner of an S Corporation and you perform services for the business, make sure you pay yourself a “reasonable salary” in relation to services performed vs dividend distributions. The officers need to pay salaries that are in line with what other businesses would pay for similar work. The IRS will scrutinize this. The key is to have this properly documented.
Tax Credits The Inflation Reduction Act (IRA) 2022 added new tax credits for new and used commercial clean vehicles (EV). The IRA also added a 30% credit for solar systems. As you know there are many factors to consider when preparing the year-end business tax return.
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