2022 INCOME TAX PLANNING

Written By Donovan Thiessen, CPA

Taxpayers and their tax advisors have faced a myriad of law changes since the Trump administration passed the 2017 tax reform. Many of the law changes that went into effect on January 1, 2018, will sunset after 2025. Suppose the laws are not extended or changed. In that case, Corporations’ maximum tax rate will increase from 21% to 35%, and the 20% qualified business income deduction available to other business income will expire. Many other tax provisions will sunset and revert to the laws in effect before 2018. This means in 2026, your Raiders and Vegas Golden Knights season tickets will once again be 50% tax-deductible if you purchase the tickets by your business and utilize them for business purposes. This article will inform you of a few other popular tax breaks and tax planning opportunities that you should consider before year-end.

For those of you still on the fence regarding the purchase of solar panels, the tax credit will decrease from 26% to 23% after 2022. To qualify for 2022, the panels must be installed and operational before December 31, 2022. The credit works for solar-powered water heaters and home battery storage. The system must be purchased, not leased. If your system cost is $20,000, you may qualify for a tax credit of $20,000 x 26% = $5,200. If you otherwise have an income tax liability of $10,000, this credit will reduce it by $5,200. If you don’t use all of your credit in 2022, it will be carried forward to 2023.

Business owners have been utilizing bonus depreciation on new and used business assets, such as vehicles, office equipment, and other assets with a useful life of 20 years or less. In 2022 you can still take 100% bonus depreciation

on qualifying purchases, meaning that the entire cost of the equipment placed in service this year can be expensed. This is particularly popular for SUVs and business-use passenger automobiles that weigh more than 6,000 lbs. After 2022, bonus depreciation will decrease from 100% to 80%. If you have qualifying assets that you are considering for your business, you should consider purchasing and placing them in service before year-end.

Business meals have been allowed a 100% tax deduction in 2021 and 2022, provided they aren’t extravagant and are consumed at the restaurant. This was enacted to prop up the struggling restaurant industry during the Covid-19 pandemic. After 2022, these meals will revert to being 50% deductible. Note that in 2022, meals that are take-out or for delivery are still subject to 50% deductibility.

If you have a health savings account (“HSA”), you can contribute up to $7,300 in 2022 if you have family coverage. If you have a solo plan, that amount is $3,650. These contributions reduce taxable income, and they do not have to be used within a calendar year, unlike its cousin, the Flex Savings Account. You can elect to apply contributions to 2022 until April 15, 2023. This account generates many questions and answers with our clients during tax season.

The gift tax exclusion is up to $16,000 in 2022. You can give your son, your neighbor, and/or your neighbor’s son $16,000 in 2022. If you are married, you and your spouse can each give $16,000 to these individuals without filing a gift tax return to the IRS. You may have an IRS Form 709 gift tax return filing requirement if you give more than that amount. This can be in the form of cash, stock, the FMV of a vehicle, gold, silver, a discounted price on the sale of a home, or a discount on rent if you are charging them less than fair market value. These are just a few examples. If you pay for another person’s education or medical expenses, you can get around this limit by paying the costs directly to the school or the medical provider.

If you are at least 70 ½ and give to nonprofit organizations, you may consider utilizing your IRA with a Qualified Charitable Deduction (“QCD”). Taxpayers commonly report charitable giving on Schedule A, but we’ve noticed that the tax benefits can be tricky now that the standard deduction is $25,900 for married filing joint and $12,950 for single filers in 2022. With a QCD, you can have the IRA trustee issue a check directly to the charitable organization (you can not receive funds from the IRA and then remit them to the organization yourself; it must go from the IRA trustee directly to the organization). This will satisfy your required minimum distribution from the IRA, and amounts contributed to the organization will be nontaxable on your tax return. This will directly reduce your adjusted gross income and taxable income. In contrast, contributions reported on Schedule A may not qualify you for itemized deductions so you would get the standard deduction in either case. With the QCD, however, you may get the standard deduction and the reduction in adjusted gross income. The annual QCD limit is $100,000. This must be done before year-end, and I highly recommend you consult with your tax adviser before completing this transaction.

If Congress fails to extend the current tax law set to expire in 2025, tax rates will go back up. Biden has also touted higher income tax rates for higher-income earners. With the ongoing budget deficits and massive debt, it is reasonable to brace for higher income tax rates in the future unless you think there will be a massive reduction in government spending. A popular and politically controversial tax strategy is the Roth IRA conversion. This is when you convert a traditional IRA to a Roth IRA and pay income tax in the current year on converted amounts. There are several good reasons to consider this right now. If you have depressed asset values, the taxable amount will be lower than if you convert it with a higher value. Prior IRA contributions can be withdrawn at any time, and earnings after the conversion grow tax-free and can be distributed tax-free as long as you are 59 ½ or older and five years have passed since the conversion. There are no required minimum distributions for Roth IRA owners. You can convert a portion of the IRA this year and in subsequent years, provided it is still allowed in the future.

As with any tax advice, you should consult your tax advisor for details on any items included in this article. Many details are impractical to include in this article and other intersecting income items that would affect your tax planning. Be mindful of the deadlines to act as well.

Donovan Thiessen, CPA is the founder and owner of The Accountant, LLC. Our mission is to help business owners make better decisions by providing timely and accurate financial and tax analysis. You may reach Donovan at donovan@ theaccounantcpa.com, www.theaccountantcpa. com, and 702.389.2727.