2022-23 Tax Planning Guide – Claim Opportunities That Fit Your Circumstances
10.19.22 | Client Alert
Tax Planning Guide Updates in Real Time
This year’s Inflation Reduction Act, the still impactful Tax Cuts and Jobs Act of 2017 (TCJA), and ongoing chatter in Washington over various tax reform proposals are all reminders to be ever watchful and flexible in your tax planning.
Take the opportunity to use Berdon’s 2022-23 Tax Planning Guide to consider significant tax law changes and planning opportunities in light of your current circumstances and goals. Then, work closely with your tax advisor to identify strategies that best align with your situation. As always, factor in flexibility to enable you to adjust to ongoing changes in tax law and your circumstances.
The guide is available in electronic form — which updates as tax laws change — and in hardcopy. It is segmented into important areas of interest such as Income & Deductions, Family & Education, Investing, Business, Retirement, Estate Planning, and Tax Rates. The guide provides charts and case studies to clarify complex concepts and help identify opportunities to pursue.
State and Local Tax Deduction Remains in Place
Despite efforts in Congress to abolish it, through 2025, a taxpayer’s entire itemized deduction for state and local taxes — including property tax and the greater of income or sales tax — is limited to $10,000 ($5,000 for married filing separately). New York and other high-income states have developed measures to work around this limitation. Deducting sales tax instead of income tax may be beneficial if you reside in a state with no or low income tax or purchase a major item, such as a car or boat.
Charitable Donations of Appreciated Securities (2022 Opportunity)
For 2022, the deduction limit for cash gifts returns to the normal 60% of the AGI limit, down from 100% last year. While an even lower limit of 30% applies to appreciated security donations, you can avoid any capital gains tax you’d owe if you sold the securities.
If you sell your home at a loss and part of your home is rented out or used exclusively for business purposes, the loss attributable to that portion may be deductible.
For 2022, this generally applies to unearned income beyond $2,300 for children under age 19 and full-time students under age 24. This tax applies unless the students provide more than half of their own support from earned income.
- American Opportunity Credit. This covers 100% of the first $2,000 of tuition and related expenses and 25% of the next $2,000 of expenses. The maximum credit per student is $2,500 per year for the first four years of postsecondary education.
- Lifetime Learning Credit. If you’re paying postsecondary education expenses beyond the first four years, you may benefit from the Lifetime Learning credit (up to $2,000 per tax return)
3.8% Net Investment Income Tax (NIIT)
Taxpayers with modified adjusted gross income (MAGI) over $200,000 ($250,000 if married filing jointly and $125,000 if married filing separately) may owe the net NIIT, which equals 3.8% of the lesser of your net investment income or the amount by which your MAGI exceeds the applicable threshold. Net investment income can include capital gains, dividends, interest, passive business income, rental income, and other investment-related income (but not business or self-rental income from an active trade or business). Important: Strategies that can help you save or defer income tax on your investments can also help you avoid or defer NIIT liability. And because the threshold for the NIIT is based on MAGI, strategies that reduce your MAGI could also help you avoid or reduce NIIT liability.
199A Deduction for Pass-through Businesses
Through 2025, the TCJA provided a Section 199A deduction for sole proprietorships and owners of pass-through entities. The deduction generally equals 20% of qualified business income (QBI), not to exceed 20% of taxable income. Important: Additional limits begin to apply if 2022 taxable income exceeds the applicable threshold — $170,050 or, if married filing jointly, $340,100. The limitations fully apply when 2022 taxable income exceeds $220,050 and $440,100, respectively.
Section 179 Expensing Election
You can currently deduct the cost of purchasing eligible new or used assets, such as equipment, furniture, off-the-shelf computer software, qualified improvement property, certain depreciable tangible personal property used predominantly to furnish lodging, and the following improvements to nonresidential real property: roofs, HVAC equipment, fire protection and alarm systems, and security systems. Important: For qualifying property placed in service in 2022, the expensing limit is $1.08 million. The break begins to phase out dollar for dollar when asset acquisitions for the year exceed $2.7 million.
An additional first-year depreciation is available for qualified assets, which include new tangible property with a recovery period of 20 years or less (Examples: office furniture and equipment), off-the-shelf computer software, and water utility property. Important: Under the TCJA, through December 31, 2026, the definition has been expanded to include used property and qualified film, television, and live theatrical productions. For qualified assets placed in service through December 31, 2022, bonus depreciation is 100%. For 2023 through 2026, bonus depreciation is scheduled to be gradually reduced as follows:
- 80% for 2023
- 60% for 2024
- 40% for 2025
- 30% for 2026
Net Operating Losses (NOLs)
The TCJA generally reduces the maximum amount of taxable income that can be offset with NOL deductions from 100% to 80%. Also, it generally prohibits NOLs from being carried back to an earlier tax year — but it allows them to be carried forward indefinitely (as opposed to the 20-year limit under pre-TCJA law). Important: There was a temporary respite from the TCJA rules for NOLs arising in the 2018 through 2020 tax years, but the rules generally returned for NOLs arising in 2021 or later.
This credit gives businesses an incentive to increase their investments in research. Certain start-ups (in general, those with less than $5 million in gross receipts) can, alternatively, use the credit against their payroll tax. Important: The credit is complicated to compute, but the tax savings can prove significant.
Required Minimum Distributions (RMDs)
Historically, after a taxpayer reaches age 70½, they were required to begin taking annual RMDs from their IRAs (except Roth IRAs) and generally from any defined contribution plans. However, the age has increased to 72 for taxpayers who didn’t turn age 70½ before January 1, 2020 (that is, who were born after June 30, 1949). Important: If you don’t comply with RMD rules, you can owe a penalty equal to 50% of the amount you should have withdrawn but didn’t. You can avoid the RMD rule for a non-IRA Roth plan by rolling the funds into a Roth IRA.
Estate Tax – Potential Cliff
While the TCJA keeps the estate tax rate at 40%, it has doubled the exemption base amount from $5 million to $10 million. The inflation-adjusted amount for 2022 is $12.06 million. Important: The estate tax exemption is scheduled to return to an inflation-adjusted $5 million in 2026. So taxpayers with estates in the roughly $6 million to $12 million range (twice that for married couples), whose estates would escape estate taxes if they were to die while the doubled exemption is in effect, still need to keep potential post-2025 estate tax liability in mind. Plus, it’s possible the exemption could be reduced sooner.
A Qualified Personal Residence Trust (QPRT)
A QPRT allows you to give your home to your children today — removing it from your taxable estate at a reduced gift tax cost (provided you survive the trust’s term) — while you retain the right to live in it for a specified period.
The above is only a selection of the wealth of information available in Berdon’s 2022-23 Tax Planning Guide. After identifying potential opportunities, contact your tax advisor to review the specifics and/or discuss other opportunities that may result in significant benefits to you, your family, and your business. Berdon professionals are always available to assist. If you are interested in connecting with one of our tax specialists, please email firstname.lastname@example.org.
Follow the links below to download or request a hardcopy of the tax planner.