In the last several years, we have seen major changes to the tax code under Congressional legislative actions. These include the Tax Cuts and Jobs Act in 2017, the Infrastructure Investment and Jobs Act in 2021 and, most recently, the Inflation Reduction Act (IRA), which was signed into law by President Biden in August 2022. In addition, new tax legislation under consideration by Congress will be debated in the coming months.
For the most part, the tax world has caught up with these changes and stabilized, making year-end planning more predictable. There are tax planning steps that can be taken in response to recent developments, in addition to tried-and-true steps than can be taken on an annual basis for both personal and small business tax returns.
PERSONAL TAX RETURNS
Increase in Retirement Contributions
Cost of living adjustments have increased the amounts you can save tax-free in various retirement plans. The amount individuals can contribute to their 401(k) plans in 2023 will increase to $22,500 — up from $20,500 for 2022. The limit on annual contributions to an individual retirement account (IRA) will increase to $6,500. Contributions for tax year 2023 can be made up to April 15, 2024.
Catch-up contributions allow people age 50 or older to save more in their 401(k)s and IRAs than the usual annual contribution limits. Catch-up contributions allow you to make up for the years you were not able to save enough. But the IRA catch up contribution limit for individuals age 50 and over did not have an annual cost of living adjustment and remains at $1,000.
Sale of Capital Items
If you are considering sales of investment items, you should consider the possible tax impact in that tax year, especially if your income fluctuates year to year. You might want to postpone the sale of a capital item to a future tax year if the resulting income would push you into a higher capital gains bracket. Conferring with your accountant will be essential in determining the optimal timing.
“Bunching” Your Deductions
Fewer taxpayers these days benefit from itemizing their tax deductions because the Standard Deduction is relatively high ($12,950 for single filers and $25,900 for joint filers in 2022). One way to maximize your deductions and exceed the Standard Deduction is a bunching strategy. This involves accumulating charitable contributions or even medical expenses from two or more years into one year.
For example, you could plan to skip your usual contributions to charity in one year and then made double the normal amount in the following year in order to help surpass the standard deduction amount. The same strategy can be employed for deductible medical expenses where your timing is flexible, such as elective surgical procedures. But purely cosmetic procedures are not deductible.
Bunching can be an effective strategy, especially if you can plan it two to three years in advance. Again, your accountant’s advice will be essential.
Electric Vehicle Tax Credit
The Inflation Reduction Act of 2022 included a somewhat revised Clean Vehicle Credit for taxpayers who purchased a plug-in electric vehicle. As in past years, the maximum credit is $7,500, but the requirements for a vehicle to qualify for the credit have become much more stringent.
While the new credit eliminates the old limitation based upon the number of qualifying vehicles sold by particular manufacturers, there will be a new limitation based on the price of the vehicle. And the vehicle’s final assembly must be in North America.
After tax year 2022, a credit will also be available for the purchase of a previously owned clean vehicle. Similar requirements for qualification apply to a previously owned clean vehicle, as well as income limitations. So before making your purchase decision, consult your tax professional to estimate the expected credit amount.
A Few More Personal Tax Issues
• You can claim a credit for tuition paid in 2022 even if the academic period begins in 2023 — as long as the period begins by the end of March.
• Your adjusted gross income (AGI) can be reduced if you increase the amount of your IRA contributions. For tax year 2022, you can contribute through April 18, 2023.
• If you are a teacher, you can claim a deduction for up to $300 of classroom expenses like books, supplies, and computer equipment, as well as personal protective equipment, disinfectant, and other supplies used to prevent the spread of COVID-19.
BUSINESS TAX RETURNS
Depreciation and Expensing
Since the Tax Cuts and Jobs Act in 2017, businesses may take advantage of 100-percent first-year depreciation on machinery and equipment purchased during the tax year, with a maximum dollar limit of $1,050,000. That maximum will be even higher in tax year 2023, so it’s a good time to plan major purchases.
Third-Party Payment Networks
As of tax year 2022, third-party payment settlement networks like PayPal or Venmo will report what you are paid over $600. You will receive a 1099-K form covering money you received throughout the year, but keeping your own ongoing record will be helpful in anticipating your tax liability and making estimated tax payments.
Mileage Rate
If you drive a vehicle for business purposes, you will want to plan on keeping a log of your trips and mileage, especially since the IRS increased the mileage rate in response to rising gas prices. For vehicle mileage driven from January 1 to June 30, 2022, the standard mileage rate is 58.5¢ per mile. From July 1 to December 31, the mileage rate rises to 62.5¢ per mile.
Corporate Alternative Minimum Tax
As part of the 2022 Inflation Reduction Act, Congress focused on very large publicly traded companies with significant earnings who pay little or no corporate tax. The IRA includes a 15% corporate alternative minimum tax on companies whose average income over a three-year period exceeds $1 billion (the “$1 Billion Test”). The intent is to have these companies pay tax on book income rather than taxable income.
How this will apply in reality and how it could impact stock prices and investments is not clear. While it applies to only a small fraction of the businesses in the US (estimated at a total of more than 33 million), it will be interesting to see how that plays out.
If you have questions about this featured topic or other accounting and tax related topics, please do not hesitate to contact us at 727-327-1999 OR [email protected].
ANY TAX ADVICE IN THIS COMMUNICATION IS NOT INTENDED OR WRITTEN TO BE USED, AND CANNOT BE USED, BY A CLIENT OR ANY OTHER PERSON OR ENTITY FOR THE PURPOSE OF (i) AVOIDING PENALTIES THAT MAY BE IMPOSED ON ANY TAXPAYER OR (ii) PROMOTING, MARKETING OR RECOMMENDING TO ANOTHER PARTY ANY MATTERS ADDRESSED HEREIN.
