With tax year 2022 coming to a close, we need to consider what can be done to help lower your tax bill for this year and next. With the uncertainty of pending legislation, here are some tax planning ideas for Individuals:
Annual gift exclusion and Estate Tax Exemption
The annual gift exclusion for 2022 is $16,000 per person, but will increase to $17,000 in 2023. Married couples who elect to gift split can give $32,000 per person in 2022 and $34,000 in 2023. There is no limit on how many donees can receive gifts in a calendar year, and there are no gift tax filing requirement as long as the annual gift exclusion per person limit isn’t exceeded.
There is also an unlimited gift exclusion for payments made on behalf of a donee as medical payments or tuition paid to an educational institution, as long as the payment is made directly to the medical care provider or educational institution
For 2022, the Unified Gift and Estate Tax Exemption is $12,060,000 per individual. For 2023, the exemption will be $12,920,000.
Cash or property can be donated to charity with a deduction for the property’s fair market value. Some cases though you may be limited to your cost basis.
Note: The “above the line” deduction for up to $300 of charitable cash contributions ($600 for married couple filing a joint return) expired the end of 2021. Keep in mind that you must itemize for 2022 (unlike 2020 and 2021) to take advantage of charitable deductions.
The 2022 deduction limits for gifts to public charities, including donor-advised funds are 30% of adjusted gross income (AGI) for contributions of non-cash assets, if the assets were held more than one year, and 60% of AGI for contributions of cash.
Individuals age 70 ½ and older can direct up to $100,000 per year from their traditional IRAs to operating charities through QCDs (Qualified Charitable deductions). The QCD can be used to satisfy all or part of the donor’s RMD for 2022 and is not considered income for the donor.
For 2022, teachers and educators that buy books, supplies, COVID – 19 protective items and other materials used in a classroom can deduct up to $300 for these out of pocket expenses per individual or max of $600 for married couples who are both eligible educators.
Tax year 2022 will be last year to take 100% bonus depreciation. Going forward, bonus amounts will drop each year by 20%. For 2023 bonus depreciation will be at 80%.
Standard Mileage Rates
The Standard mileage rate from January 1 to June 30, 2022 is now 58.5 cents per mile and from July 1 to December 31, 2022 the rate is 62.5 cents per mile.
Child Tax Credit
For 2022, the credit tax credit reverts back to $2000 per child, with the credit being phased out for families with modified adjusted gross income above $200,000 for single filers and $400,000 for joint filers. In addition, children who are 17 years old do not qualify for the credit as they had in prior year.
The 2022 contribution limit for traditional IRA’s and ROTH IRA’s is $6,000 plus $1,000 as an additional catch up contribution for individuals age 50 and up, subject to income limitations.
For ROTH IRA’s contribution phase out in 2022 is at adjusted gross income of $204,000 to $214,000 for couples and $129,000 to $144,000 for singles.
Deduction phase out for traditional IRA’s is $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 for deducting a contribution for the uncovered spouse starts at $204,000 of AGI and ends at $214,000.
Required Minimum Distributions (RMD)
A required minimum distribution (RMD) is an IRS-mandated amount of money that you must withdraw from a tax-deferred retirement account which include: traditional IRA’s, rollover IRA’s, SIMPLE IRA’s, SEP IRA’s and most 401(K) and 403(b) plans or an employer sponsored retirement account each year, starting at age 72.
When must you take RMDs: If you reach age 72 in 2022, you must take your first RMD, by April 1, 2023, with subsequent RMDs by December 31 annually thereafter. Keep in mind, if you delay your initial RMD until April 1, 2023 you’ll be responsible for 2 withdrawals that year (one by April 1 and one by December 31), which could result in a larger tax liability.
Inherited IRA’s by a Non-Spouse
Non-spouse beneficiaries who inherit IRA assets after January 1, 2020 are required to withdraw the full balance of the account within 10 years.
Inherited Roth IRA’s
Under the SECURE Act rules, most non-spouse beneficiaries must deplete an inherited Roth IRA within 10 years of the original owner’s death, if that occurred in 2020 or later. If you inherit a Roth IRA from a spouse, you can treat the account as your own or stretch distributions over your lifetime.
Energy Efficient Home Improvement Credit
The old credit worth 10% of the costs of installing insulation, windows, doors, roofing and other energy saving improvements along with the $500 lifetime limitation still applies through 2022.
For 2023, a $1,200 annual tax credit limit will replace the old $500 lifetime limit. The credit is equal to 30% of the costs of all eligible home improvements made during the year. Note that aside from the above in terms of 30% credit limits and annual limits, there are specific limits per year on components such as windows ($600 per year) and exterior doors ($250 per door and $500 for all doors)
Clean Vehicle Credit
Individuals may be eligible for a credit upon the purchase of an electric vehicle in the 2022 tax year. A motor vehicle is defined as a vehicle that is used on public streets, roads, and highways. Off road vehicles such as golf carts do not qualify for the credit.
Highlights of the credit:
- An individual who purchased an electric vehicle prior to August 16, 2022 may qualify for the new qualified plug-in electric drive motor vehicle credit. The maximum amount of credit a taxpayer can qualify for is $7,500.
- All electric, or clean, vehicles purchased after August 16, 2022 are subject to the clean vehicle credit rules. The maximum amount of the credit a taxpayer can qualify for remains at $7,500, but is subject to restrictions related to the vehicle battery components and where manufactured/ assembled.
- Taxpayers are eligible for the clean vehicle credit if their modified adjusted gross income does not exceed $300,000 (married filing jointly), $225,000 (head of household), and $150,000 (all other filing statuses) in 2023.
- The credit is disallowed for vans, sport utility vehicles (SUVs), and pickup trucks with a manufacturer’s suggested retail price (MSRP) greater than $80,000 and all other vehicles with an MSRP greater than $55,000.
- Taxpayers can only claim the clean vehicle credit for one vehicle each year.
- A credit for used clean vehicles is limited to $4,000 or thirty percent of the vehicle’s sale price, whichever is lower. In order for the taxpayer to use this credit, their modified adjusted gross income cannot exceed $150,000 (married filing joint), $112,500 (head of household), and $75,000 (all other filing statuses). Used clean vehicles that are eligible for the credit must have a model year at least two years preceding its year of sale to the taxpayer and cannot have a sale price greater than $25,000.
These are just some planning ideas to consider for 2022 and 2023 and are general in nature. If you have any questions or need further information please contact your TBC advisor.