November 27, 2023

IRS announces 2023 Form 1099-K reporting threshold delay for third party platform payments; plans for a $5,000 threshold in 2024 to phase in implementation

Following feedback from taxpayers, tax professionals, and payment processors and to reduce taxpayer confusion, the Internal Revenue Service delayed the new $600 Form 1099-K reporting threshold requirement for third party payment organizations for tax year 2023 and is planning a threshold of $5,000 for 2024 to phase in the new law.

Third party payment organizations include many popular payment apps and online marketplaces.

The agency is making 2023 another transition year to implement the new requirements under the American Rescue Plan that changed the Form 1099-K reporting threshold for payments taxpayers get selling goods or providing a service over $600. The previous reporting thresholds will remain in place for 2023.

What this means

This means that for 2023 and prior years, payment apps and online marketplaces are only required to send out Forms 1099-K to taxpayers who receive over $20,000 and have over 200 transactions. For tax year 2024, the IRS plans for a threshold of $5,000 to phase in reporting requirements.

This phased-in approach will allow the agency to review its operational processes to better address taxpayer and stakeholder concerns.

Taxpayers should be aware that while the reporting threshold remains over $20,000 and 200 transactions for 2023, companies could still issue the form for any amount.

It’s important to note that the higher threshold does not affect the actual tax law to report income on your tax return. All income, no matter the amount, is taxable unless it’s excluded by law whether a Form 1099-K is sent or not.

Who gets the form

The Form 1099-K could be sent to anyone who’s using payment apps or online marketplaces to accept payments for selling goods or providing services. This includes people with side hustles, small businesses, crafters and other sole proprietors.

However, it could also include casual sellers who sold personal stuff like clothing, furniture and other household items that they paid more than they sold it for. Selling items at a loss is not actually taxable income but would have generated many Forms 1099-K for many people with the $600 threshold.

This complexity contributed to the IRS decision to delay the additional year to provide the agency time to update its operations to make it easier for taxpayers to report the amounts on their forms.

What to do

The IRS Understanding your Form 1099-K webpage provides resources for taxpayers who receive a 1099-K, including what to do with a Form 1099-K and what to do if you get a Form 1099-K in error.

Taxpayers who receive a Form 1099-K should review the forms, determine if the amount is correct, and determine any deductible expenses associated with the payment they may be able to claim when they file their taxes.

The payment on a Form 1099-K may be reported in different places on your tax return depending on what kind of payment it is. For example, someone who is getting paid as a ride share driver could report it on a Schedule C.

People who sold personal items must determine if the amounts on their forms were losses or gains. If taxpayers are unsure of the original price, they can learn more on how to figure out the items worth and how to establish basisPDF.

Selling personal items at a loss

If taxpayers sold at a loss, which means they paid more for the items than they sold them for, they’ll be able to zero out the payment on their tax return by reporting both the payment and an offsetting adjustment on a Form 1040, Schedule 1. This will ensure people who unnecessarily get these forms don’t have to pay taxes they don’t owe.


If you sold personal items at a loss, you have 2 options to report the loss:

Report on Schedule 1 (Form 1040)

You can report and then zero out the Form 1099-K gross payment amount on Schedule 1 (Form 1040), Additional Income and Adjustments to IncomePDF.

Example: You receive a Form 1099-K that includes the sale of your car online for $21,000, which is less than you paid for it.

On Schedule 1 (Form 1040):

  • Enter the Form 1099-K gross payment amount (Box 1a) on Part I – Line 8z – Other Income: “Form 1099-K Personal Item Sold at a Loss, $21,000”
  • Offset the Form 1099-K gross payment amount (Box 1a) on Part II – Line 24z – Other Adjustments:“Form 1099-K Personal Item Sold at a Loss $21,000”

These 2 entries result in a $0 net effect on your adjusted gross income (AGI).

Report on Form 8949

You can also report the loss on Form 8949, Sales and Other Dispositions of Capital Assets, which carries to Schedule D, Capital Gains and Losses.

Selling personal items at a gain

If they were sold at a gain, which means they paid less than they sold it for, they will have to report that gain as income, and it’s taxable.

If you receive a Form 1099-K for a personal item sold at a gain, report it on both:

What should not be reported

Reporting is not required for personal transactions such as birthday or holiday gifts, sharing the cost of a car ride or meal, or paying a family member or another for a household bill. These payments are not taxable and should not be reported on Form 1099-K.

Additional information and resources

The IRS provides comprehensive information on the Understanding your Form 1099-K webpage that includes more details on receiving and reporting Forms 1099-K to help taxpayers navigate this complicated issue. In addition, the IRS will continue to update its communications, providing additional details soon.


October 19, 2023

October 19, 2023

RE: Corporate Transparency Act — Beneficial Ownership Information Reporting Requirement

The Corporate Transparency Act (“CTA”) was enacted into law as part of the National Defense Act for Fiscal Year 2021. The CTA requires the disclosure of the beneficial ownership information (otherwise known as “BOI”) of certain entities from people who own or control a company.

It is anticipated that 32.6 million businesses will be required to comply with this reporting requirement. The intent of the BOI reporting requirement is to help US law enforcement combat money laundering, the financing of terrorism and other illicit activity.

The CTA is not a part of the tax code. Instead, it is a part of the Bank Secrecy Act, a set of federal laws that require record-keeping and report filing on certain types of financial transactions. Under the CTA, BOI reports will not be filed with the IRS, but with the Financial Crimes Enforcement Network (FinCEN), another agency of the Department of Treasury.

We’re here to help assess if you have a BOI reporting requirement and how to meet the reporting obligation. Please contact us at your earliest convenience to discuss your business situation.

In the meantime, below is preliminary information to consider as we approach the implementation period for this new reporting requirement.

 What entities are required to comply with the CTA’s BOI reporting requirement?

 Entities organized both in the U.S. and outside the U.S. may be subject to the CTA’s reporting requirements. Domestic companies required to report include corporations, limited liability companies (LLCs) or any similar entity created by the filing of a document with a secretary of state or any similar office under the law of a state or Indian tribe.


Domestic entities that are not created by the filing of a document with a secretary of state or similar office are not required to report under the CTA.

Foreign companies required to report under the CTA include corporations, LLCs or any similar entity that is formed under the law of a foreign country and registered to do business in any state or tribal jurisdiction by filing a document with a secretary of state or any similar office.

 Are there any exemptions from the filing requirements?

 There are 23 categories of exemptions. Included in the exemptions list are publicly traded companies, banks and credit unions, securities brokers/dealers, public accounting firms, tax-exempt entities and certain inactive entities, among others. Please note these are not blanket exemptions and many of these entities are already heavily regulated by the government and thus already disclose their BOI to a government authority.

In addition, certain “large operating entities” are exempt from filing. To qualify for this exemption, the company must:

  1. Employ more than 20 people in the U.S.;
  2. Have reported gross revenue (or sales) of over $5M on the prior year’s tax return; and
  3. Be physically present in the U.S.

Who is a beneficial owner?

 Any individual who, directly or indirectly, either:

  • Exercises “substantial control” over a reporting company, or
  • Owns or controls at least 25 percent of the ownership interests of a reporting company
    An individual has substantial control of a reporting company if they direct, determine or exercise substantial influence over important decisions of the reporting company. This includes any senior officers of the reporting company, regardless of formal title or if they have no ownership interest in the reporting company.

The detailed CTA regulations define the terms “substantial control” and “ownership interest” further.

 When must companies file?

 There are different filing timeframes depending on when an entity is registered/formed or if there is a change to the beneficial owner’s information.

  • New entities (created/registered after 12/31/23) — must file within 30 days
    • There is proposed rulemaking allowing for new entities created in 2024 only to extend the 30-day timeframe to 90 days.
  • Existing entities (created/registered before 1/1/24) — must file by 1/1/25
  • Reporting companies that have changes to previously reported information or discover inaccuracies in previously filed reports — must file within 30 days

 What sort of information is required to be reported?

 Companies must report the following information: full name of the reporting company, any trade name or doing business as (DBA) name, business address, state or Tribal jurisdiction of formation, and an IRS taxpayer identification number (TIN).

Additionally, information on the beneficial owners of the entity and for newly created entities, the company applicants of the entity is required. This information includes — name, birthdate, address, and unique identifying number and issuing jurisdiction from an acceptable identification document (e.g., a driver’s license or passport) and an image of such document.

 Understand your reporting requirement.

 Penalties for willfully not complying with the BOI reporting requirement can result in criminal and civil penalties of $500 per day and up to $10,000 with up to two years of jail time. Please contact our office today at 915-351-8272 to discuss. As always, planning ahead can help you comply and understand your filing obligations.


Tammy Vasilatos, CPA


January 9, 2023

Businesses and tax-exempt organizations that buy a qualified commercial clean vehicle may qualify for a clean vehicle tax credit of up to $40,000 under Internal Revenue Code (IRC) 45W.  The credit equals the lesser of:

  • 15% of your basis in the vehicle (30% if the vehicle is not powered by gas or diesel)
  • The incremental cost of the vehicle

The maximum credit is $7,500 for qualified vehicles with gross vehicle weight ratings (GVWRs) of under 14,000 pounds and $40,000 for all other vehicles.

Who Qualifies

Businesses and tax-exempt organizations qualify for the credit.

There is no limit on the number of credits your business can claim. For businesses, the credits are nonrefundable, so you can’t get back more on the credit than you owe in taxes. A 45W credit can be carried over as a general business credit.

Vehicles That Qualify

To qualify, a vehicle must be subject to a depreciation allowance, with an exception for vehicles placed in service by a tax-exempt organization and not subject to a lease.

The vehicle must also:

  • Be made by a qualified manufacturer as defined in IRC 30D(d)(1)(C)
  • Be for use in your business, not for resale
  • Be for use primarily in the United States
  • Not have been allowed a credit under sections 30D or 45W

In addition, the vehicle must either be:

  • Treated as a motor vehicle for purposes of title II of the Clean Air Act and manufactured primarily for use on public roads (not including a vehicle operated exclusively on a rail or rails); or
  • Mobile machinery as defined in IRC 4053(8) (including vehicles that are not designed to perform a function of transporting a load over a public highway)

The vehicle or machinery must also either be:

  • A plug-in electric vehicle that draws significant propulsion from an electric motor with a battery capacity of at least:
    • 7 kilowatt hours if the gross vehicle weight rating (GVWR) is under 14,000 pounds
    • 15 kilowatt hours if the GVWR is 14,000 pounds or more; or
  • A fuel cell motor vehicle that satisfies the requirements of IRC 30B(b)(3)(A) and (B).

How to Claim the Credit

We’re finalizing a form for you to claim the credit. Please check back for updates.

You will need to provide your vehicle’s VIN along with the amount of the credit.

The depreciable basis of the vehicle is reduced by the amount of the commercial clean vehicle credit you receive.



January 9, 2023

Credits for New Clean Vehicles Purchased in 2023 or After

 If you buy a new plug-in electric vehicle (EV) or fuel cell vehicle (FCV) in 2023 or after, you may qualify for a clean vehicle tax credit. Find out if you qualify.

Find information on credits for used clean vehiclesqualified commercial clean vehicles, and new plug-in EVs purchased before 2023.

Who Qualifies

You may qualify for a credit up to $7,500 under Internal Revenue Code Section 30D if you buy a new, qualified plug-in EV or fuel cell electric vehicle (FCV). The Inflation Reduction Act of 2022 changed the rules for this credit for vehicles purchased from 2023 to 2032.

The credit is available to individuals and their businesses.

To qualify, you must:

  • Buy it for your own use, not for resale
  • Use it primarily in the U.S.

In addition, your modified adjusted gross income (AGI) may not exceed:

  • $300,000 for married couples filing jointly
  • $225,000 for heads of households
  • $150,000 for all other filers

You can use your modified AGI from the year you take delivery of the vehicle or the year before, whichever is less. If your modified AGI is below the threshold in 1 of the two years, you can claim the credit.

The credit is nonrefundable, so you can’t get back more on the credit than you owe in taxes. You can’t apply any excess credit to future tax years.

Qualified Vehicles

To qualify, a vehicle must:

  • Have a battery capacity of at least 7 kilowatt hours
  • Have a gross vehicle weight rating of less than 14,000 pounds
  • Be made by a qualified manufacturer. See our index of qualified manufacturers and vehicles.
    • FCVs do not need to be made by a qualified manufacturer to be eligible. See Rev. Proc. 2022-42PDF for more detailed guidance.
  • Undergo final assembly in North America

The sale qualifies only if:

  • You buy the vehicle new
  • The seller reports required information to you at the time of sale and to the IRS.
    • Sellers are required to report your name and taxpayer identification number to the IRS for you to be eligible to claim the credit.

In addition, the vehicle’s manufacturer suggested retail price (MSRP) can’t exceed:

  • $80,000 for vans, sport utility vehicles and pickup trucks
  • $55,000 for other vehicles

MSRP is the retail price of the automobile suggested by the manufacturer, including options, accessories and trim but excluding destination fees. It isn’t necessarily the price you pay.

To confirm whether a vehicle is a van, sport utility vehicle, pickup truck or other, see our qualified vehicles and manufacturers.

You can find your vehicle’s weight, battery capacity, final assembly location (listed as “final assembly point”) and VIN on the vehicle’s window sticker.

To check online if a specific vehicle meets the requirements for final assembly location, go to the Department of Energy’s page on Electric Vehicles with Final Assembly in North America and use the VIN Decoder tool under “Specific Assembly Location Based on VIN.”

How to Claim the Credit

To claim the credit, file Form 8936, Qualified Plug-in Electric Drive Motor Vehicle Credit (Including Qualified Two-Wheeled Plug-in Electric Vehicles) with your tax return. You will need to provide your vehicle’s VIN.


October 31, 2022

Year-End Tax Planning for 2022
At the end of 2022, the United States is still recovering from the COVID-19 pandemic and tax
professionals are dealing with the multiple changes in the tax rules designed to help the country
cope with the economic impact of the disease. These rules should be considered in year-end
tax planning, along with other changes in the law and existing provisions that impact end-of-year
As of press time, major tax changes from recent years generally remain in place, including lower
income tax rates, larger standard deductions, limited itemized deductions, elimination of
personal exemptions, a lessened alternative minimum tax (AMT) for individuals, a major
corporate tax rate reduction, limits on interest deductions, and generous expensing and
depreciation rules for businesses. And non-corporate taxpayers with certain income from passthrough entities may still be entitled to a valuable deduction.
Over the summer, President Biden announced a three-part plan to address student loan debt,
including forgiveness of up to $20,000 for some borrowers and extended the repayment freeze
a final time, until the end of this year. Note that through 2025, the cancellation of student loans
is not taxable cancellation of indebtedness income.
There was one major tax bill passed late in 2021: the Infrastructure and Investment Jobs Act
(IIJA). And there has been one major tax bill passed in 2022: the Inflation Reduction Act of
Key tax provisions of the IIJA include the retroactive termination of the employee retention credit
back to October 1, 2021, and information reporting for digital assets like cryptocurrency. In
addition, the IIJA contains tax provisions covering disaster relief, capital contributions to public
utilities, excise taxes, and pension interest rates.
And although the changes made by the Inflation Reduction Act of 2022 generally aren’t effective
until 2023 (and beyond), the Act did make notable changes to some energy credits and other
items that should be discussed with clients.
To assist you in developing year-end tax planning strategies for your clients, Checkpoint’s tax
experts have analyzed current tax rules to identify the unique opportunities and challenges
facing taxpayers in the current year.
This Special Report discusses the year-end issues faced by individuals, as well as businesses
and business owners and provides sample checklists and client letters.

Year-End Tax Planning for 2022: Individuals
What’s new for individuals in 2022?
• Many of the tax benefits related to the COVID-19 pandemic have expired or reverted to
their pre-pandemic levels.
• Expanded health insurance subsidies are extended through 2025.
• Both the child tax credit and the child and dependent care credit revert to pre-pandemic
Pending legislation
As of press time, pending legislation is wending its way through Congress. Three bills now
represent the basis for proposed retirement plan reform commonly known as SECURE Act 2.0.
Provisions prominent in all three bills include: automatic enrollment in or expanded access to
certain retirement plans; another increase to the age at which required minimum distributions
must start; enhancements to the age 50+ catch-up contribution provisions; and creating an
online “lost and found.”
Also, 34 temporary tax provisions expired at the end of 2021 (although many of those provisions
were energy-related and modified and extended in the Inflation Reduction Act of 2022). In
addition, an omnibus spending package expected in December is considered the most likely
vehicle for any tax extender legislation for 2022. Currently, provisions affecting individuals that
are scheduled to expire at the end of 2022 include the temporary allowance of a 100%
deduction for business meals, the mortgage insurance premium deduction, COVID-19 credits
for sick and family leave for the self-employed, and more.
Filing status and dependents
When recommending year-end tax planning strategies, review the taxpayer’s expected filing
status this year and next and the number of dependents the taxpayer expects to claim in each
What’s new?
• The following individual credits have changed: The CTC reverts to $2,000 and the old
phase-out applies.
• The age of a qualifying child decreases to under age 17
• The child and dependent care credit reverts to its pre-pandemic amount.
• The exclusion from income for employer-provided dependent care assistance also
decreases to pre-pandemic levels.
Filing status
A taxpayer’s marital status for the entire year is determined as of December 31. A taxpayer who
is married (or divorced) as of the end of the year is treated as if they were married (or single) all
year long. Taxpayers who are separated or divorcing need to consider tax implications of
property settlements, alimony, child support, retirement plan allocations, and other related
Proper timing when the change in marital status occurs can save taxes. If married filing joint or
married filing separate status will result in more total tax than if each spouse files a separate
return using single (or head of household) filing status, ending the marriage prior to year-end
could result in tax savings. In contrast, if married status results in lower tax liability, delaying the
divorce or legal separation until the beginning of the next year might be advisable.
Note. This strategy may not apply in a community property state and other liability concerns
related to joint filing may outweigh the potential tax benefit.
If two high-income taxpayers are planning to wed, advise on the effect of a potential marriage
penalty. A “marriage penalty” exists whenever the tax on a couple’s joint return is more than the
combined taxes each spouse would pay if they weren’t married and each filed a single return.
The marriage penalty can apply to joint filers whose income falls into the 35% bracket. However,
even for taxpayers below the 35% bracket, a marriage penalty can nevertheless kick in through
the tax treatment of other items including:
• Student loan interest deduction
• Net investment income tax (NIIT)
• Deductible contributions to traditional IRAs by taxpayers who are active participants in
an employer-sponsored retirement plan
• MAGI limits on Roth IRA contributions (taxpayers who are married filing joint can still
generally contribute, but should consider applicable MAGI limits and the possibility that a
spouse’s higher income could impact each of them and their ability to contribute)
• Child tax credit and additional child tax credit
• State and local tax deduction
• Qualified business income (pass-through) deduction
• Additional 0.9% Medicare tax
• Taxable amount of social security
• Related party and constructive ownership rules
A taxpayer who currently qualifies for head of household tax status may benefit from pulling
more income into this year if changed circumstances (such as getting married) will end their
head of household status next year. Accelerating income may also benefit certain widows or
widowers whose spouses died in 2021 and who are entitled to use joint return rates in 2022, but
not in 2023.
Although the deduction for dependency exemptions is $0 for 2018–2025, certain tax deductions
and credits (including the child tax credit for qualifying children under 17) are available with
respect to the taxpayer’s dependent. A dependent is defined as either a qualifying child or a
qualifying relative.
To meet the dependent rules for qualifying child, an individual must be under 19 at the end of
the year, a full-time student who is under 24 (the age test) or permanently disabled. To be a
qualifying relative the person must have less than $4,400 of income and meet other
For dependents that need to meet a residence, support, or income test, review whether these
tests are likely to be met before year-end.
Recommendation: In joint custody situations, taxpayers planning to claim
head of household status should maintain records of the amount of time a
child spends in each household.
Increasing and decreasing AGI
For individuals, year-end tax planning commonly involves methods for increasing and
decreasing AGI. Generally, taxpayers will aim to decrease AGI to reduce their overall tax
liability. But, there are some instances when it will make sense for the taxpayer to increase AGI
in a particular tax year.
What’s new?
The contribution amounts and carryover periods for unused amounts in a health flexible
spending arrangement (health FSA) and dependent care (DC) FSAs have changed as follows:
• For plan years ending in 2022, the contribution limit for health FSAs is $2,850.
• The maximum health FSAs may allow participants to carry over to 2023 is reduced to
• Carried over funds must be used in the first 2½ months of 2023.
• The contribution limit for dependent care FSAs drops back from $10,500 to $5,000
($2,500 for separate filers).
Who should increase AGI?
A taxpayer who expects to be taxed at a higher rate next year should explore strategies to
increase AGI this year by accelerating the recognition of income. An individual taxpayer might
be in a higher tax bracket next year if:
• The taxpayer is graduating from school or a training program and moving into the paid
• Head-of-household or surviving spouse status ends after this year.
• The taxpayer plans to get married next year and will be subject to a marriage penalty.
• The taxpayer expects to be eligible for one or more credits next year (e.g., the child tax
credit) that is subject to phaseout when AGI reaches specified limits and is otherwise not
eligible for the credit this year.
Caution: Any decision to accelerate income from a later year into an earlier
one should consider the time value of money.
Who should decrease AGI?
A taxpayer who expects to be subject to the same or a lower tax rate next year should consider
deferring income recognition. A taxpayer might be in a lower tax bracket next year if:
• The taxpayer becomes eligible for head-of-household status next year.
• The taxpayer expects to have a lower income next year due to retirement, job change, or
other change in circumstance.
• The taxpayer is currently a child who will escape the kiddie tax next year and be in a
lower bracket than their parents.
Numerous tax benefits phase out at specified AGI thresholds. As year-end nears, taxpayers
who otherwise qualify for a tax benefit should consider strategies to reduce AGI this year to
keep their income level below the relevant phaseout threshold. Some tax benefits that are
limited by AGI (or modified AGI) include:
• Nondeductible Roth IRA contributions
• Deductible traditional IRA contributions
• Child tax credits
Observation: Child tax credits phase out in $50 increments meaning that, for
some taxpayers, a $1 increase in AGI can trigger a $50 reduction in the credit.
• Qualified adoption expenses
• Student loan interest deductions
• Maximum amount of nonpassive income that can be used to offset passive losses from
an active participation rental real estate activity
How to increase or decrease AGI before year-end
Taxpayers may be able to accelerate recognition of income by:
• Accelerating installment sale gain. A taxpayer who has unrealized profit on obligations
arising out of installment sales made in prior years could sell part or all of the obligations
or negotiate with the buyer for accelerated payments.
• Recognizing savings bond interest. A taxpayer can redeem U.S. Saving Bonds, or, for
unmatured Series EE or I bonds, elect to report interest each year as it accrues. That
way, all the income accrued through the end of this year (including interest that accrued
in earlier years) is taxed in 2022.
Caution: This election can’t be reversed without IRS consent. The taxpayer
must, in all future years, pay tax annually on interest as it accrues, and not in
the year the bonds mature or are redeemed.
Taxpayers may be able to reduce or defer recognition of income by:
• Recognizing capital losses. Taxpayers with unrecognized capital losses should consider
recognizing those losses this year to offset capital gains that would otherwise be subject
to the 15% or 20% long-term capital gains tax rate. Capital losses can also offset up to
$3,000 ($1,500 in the case of a married taxpayer filing a separate return) of ordinary
income if capital losses exceed capital gains by at least that amount. Recognizing capital
losses to offset capital gains can also reduce the amount of income subject to the net
investment income surtax.
• Increasing contributions to 401(k) plans, SIMPLE pension plans, Keogh plans. Some
individuals may be able to reduce AGI by increasing contributions to retirement plans
such as 401(k) plans, SIMPLE pension plans, and Keogh plans.
• Making IRA contributions. Taxpayers have until the tax return filing deadline next April to
make IRA contributions for 2022. Unlike Keogh plans, which must be in existence by
year-end, IRAs can be set up when the contribution is made next year. Taxpayers might
want to make IRA contributions earlier rather than later to maximize tax-deferred income
on the contributed amount. Eligible taxpayers can also deduct contributions to traditional
IRAs, subject to limitations.
• Increasing contributions to a health savings account (HSA) or health FSA. Individuals
who are covered by a qualifying high deductible health plan (and are generally not
covered by any other health plan that is not a qualifying high deductible health plan) may
make deductible contributions to an HSA, subject to certain limits. Becoming HSAeligible before year-end can salvage an HSA contribution made earlier in the year.
• Deferring debt cancellation events. If a taxpayer is planning to make a deal with creditors
involving debt reduction, reacquire outstanding obligations for less than face amount, or
planning some other debt reduction transaction that may result in the recognition of
taxable income, postponing action until January can defer recognition of cancellation of
indebtedness (COD) income.
Caution: When determining whether to defer debt cancellation, consider
whether the taxpayer might be eligible to exclude COD income under an
exception in Code Section 108 for insolvency, bankruptcy, certain student
loans, and other circumstances.
Capital gains and losses
The appropriate year-end planning strategy for capital gains and losses depends on many
factors including an individual’s taxable income, tax rate, amount of adjusted net capital gain,
and whether the individual has unrealized capital losses. For high-income taxpayers, planning
must also take into account the 3.8% net investment income tax (NIIT).
When to recognize gains and losses
As year-end approaches, the taxpayer’s income, gains, and losses for the year become more
certain. This provides strategic planning opportunities. Many of these strategies also apply to
reducing the impact of the NIIT.
Recognizing long-term capital gains may be beneficial if the taxpayer will be subject to a higher
rate in the future. For taxpayers with taxable income below the zero-rate threshold amount,
consider recognizing long-term gains up to the threshold amount.
Avoid recognizing long-term capital losses if taxable income from long-term capital gains and
other sources will be below the zero-rate threshold amount, or if the taxpayer will be subject to a
higher rate next year. However, taxpayers who have no capital gains should consider
recognizing capital losses up to $3,000 ($1,500 in the case of a married taxpayer filing a
separate return), which can be used to offset ordinary income.
Taxpayers holding municipal bonds that have decreased in value may benefit from a bond
swap. This enables a taxpayer to recognize a loss for the decline in a bond’s value while
maintaining the cash flow generated by the bond. A bond swap is especially beneficial if the
taxpayer has short-term capital gains that can be offset by the bond’s capital loss, or the
taxpayer’s overall net capital loss after the bond disposition is $3,000/$1,500 or less (which the
taxpayer can offset with other ordinary income).
Caution: Watch out for the wash sale rules (discussed below) if the
replacement bond is purchased within 30 days of the sale of the old bond and
the bonds are substantially identical.
Taxpayers can use the installment method to defer gain recognition on the sale of eligible
assets. Under an installment sale, gain is recognized in the year payments are received. A likekind exchange can also be used to defer gain on eligible exchange property.
Taxpayers should consider donating appreciated securities to an exempt organization instead of
selling the securities and donating cash to the organization. That way, the gains will not be
included on the donor’s return.
Selling a principal residence? Strategic timing can yield tax benefits. A taxpayer who sells
property used as a principal residence for at least two of the five years before the sale may
exclude up to $500,000 in gain if married and filing a joint return. Taxpayers with another filing
status (single, head-of-household and married filing separately) may exclude up to $250,000. A
surviving spouse can qualify for the higher $500,000 exclusion if the sale occurs not later than
two years after the decedent spouse’s death, if the requirements for the $500,000 exclusion
were met immediately before death, and the survivor did not remarry before the sale.
Wash sales
The “wash sale” rule prevents a taxpayer from recognizing a loss on disposition of stock or
securities when substantially identical stock or securities are bought and sold within a 61-day
period (30 days before or 30 days after the date of sale). Thus, a taxpayer can’t sell the stock or
securities to establish a tax loss and simply buy it back the next day. The wash sale rule also
applies if the taxpayer acquires an option to buy substantially identical stock or securities or if
the taxpayer acquires substantially identical stock via their IRA. However, it is possible to
partially preserve an investment position while realizing a tax loss by using one of these
• Double up. Buy more of the same stock or securities, then sell the original holding at
least 31 days later. The risk here is the possibility of further downward price movement.
• Wait. Sell the original holding and then buy the same stock or securities at least 31 days
• Shift investments. Sell the original holding and buy similar securities in different
companies in the same line of business. In the case of mutual fund shares, sell the
original holding and buy shares in another mutual fund that uses a similar investment
strategy. A similar strategy can be used with Exchange Traded Funds.
Observation: The wash sale rule applies only when stock or securities are sold
at a loss. As a result, a taxpayer can recognize a gain on the sale of stock or
securities in 2022 and then buy the substantially identical stock or securities
back immediately without having to worry about the wash sale rule.
Constructive sales
Under the constructive sale rules, an appreciated financial position in stock is treated as sold,
causing the taxpayer to recognize gain if the shareholder enters into a short sale of the same or
substantially identical property, or enters into an offsetting notional principal contract, a put
option, or similar transaction. The constructive sale causes the shareholder to recognize gain as
if the appreciated shares were sold at fair market value on the date of the short sale or other
similar transaction.
Under an exception to the constructive sale rules, however, gain may still be deferred with a
short sale against the box, or other similar transaction, if (1) the transaction is closed before the
31st day after the close of the tax year; (2) the taxpayer holds the appreciated stock throughout
the 60-day period beginning on the date the transaction is closed; and (3) at no time during that
60-day period is the taxpayer’s risk of loss on the appreciated stock reduced by an option to
sell, a short sale, or other similar position with respect to substantially identical stock.
Short sellers who want to defer a year-end gain on a short position to the beginning of the
following year should wait until after year-end to begin to cover their short position. Those that
want to take a year-end gain on a short position, for example to be able to use a recognized
loss, can do so as late as the last trading day of the year by purchasing the stock that will be
used to close the short position.
Installment sales
An installment sale can be an effective technique for closing certain transactions this year while
deferring a substantial part of the tax on the sale to later years.
Consider using the installment sale method when selling Code Sec. 1231 property if the
taxpayer has already recognized losses from sales of other Code Sec. 1231 property and would
otherwise recognize a net Code Sec. 1231 loss this year. A net Code Sec. 1231 loss is treated
as an ordinary loss that offsets ordinary income and is not subject to capital loss limits.
Taxpayers have until the due date of their return (including extensions) to decide whether to
elect out of installment reporting.
Caution: While maximizing current Code Sec. 1231 losses may produce a
currently deductible ordinary loss, it also may cause future Code Sec. 1231
gains to be taxed as ordinary income rather than capital gain. Net Code Sec.
1231 gains are treated as ordinary to the extent of net Code Sec. 1231 losses
for the previous five tax years that haven’t been offset by Code Sec. 1231
gains in an intervening tax year.
Many types of transactions are not eligible for the installment sale method including sales at a
loss, sales of stock or securities traded on an established securities market, and gain that’s
recapturable under Code Sec. 1245.
Dealers in property generally are barred from reporting current sales or dispositions under the
installment method. However, dealers may use the installment method on sales of farm
property, and on certain sales of timeshares and residential lots, if the seller elects to pay
interest on the tax deferred by installment reporting.
Passive activity limitations
Losses generated by passive activities may only be used to offset passive activity income.
Passive activity credits may be used only to offset tax on income from passive activities, with a
carryover of any unused credits. In addition, the 3.8% NIIT applies to income from passive
activities, but not from income generated by an activity in which the taxpayer is a material
participant. Taxpayers can employ several year-end strategies for managing passive activity
Increase participation in the activity before year-end to satisfy the material participation test. A
taxpayer can satisfy the material participation test by participating in an activity more than 500
hours during the tax year, participating more than 100 hours if no one else does more, or
participating more than 500 hours in all the taxpayer’s “significant participation activities.”
Illustration: Javier owns interests in a restaurant, a shoe store, and an orange
grove. Each of these ventures has several full-time employees. As of October
31, Javier has worked 200 hours in the restaurant, 200 hours in the shoe
store, and 75 hours in the orange grove. If, by the end of the year, he puts in
another 26 hours in the orange grove, he will have participated more than 500
hours in all his significant participation activities and the material participation
standard will be satisfied.
To facilitate the preceding strategy, consider taking advantage of the one-time opportunity to
regroup activities for the purpose of applying the passive activity rules.
Consider selling the passive activity. If a taxpayer disposes of their entire interest in the activity
in a fully taxable transaction, then any loss from the activity for the tax year of disposition
(including losses carried over from earlier years), over any net income or gain for the tax year
from all other passive activities (including carryover losses from earlier years), is treated as a
nonpassive loss. However, suspended passive activity credits are not freed up when the activity
that generated them is sold, but the taxpayer may elect to increase the property’s basis by the
amount of the unused credits.
Caution: If a passive activity is disposed of by means of an installment sale,
suspended losses will become available for use in offsetting nonpassive
income only as the buyer makes payments and in proportion to the amount of
gain recognized with respect to these payments. To avoid this result, elect out
of the installment method.
Real estate professionals can deduct some rental realty losses. For eligible taxpayers, losses
and credits from rental real estate activities in which the taxpayer materially participates are not
treated as passive and can be used to offset nonpassive activity income.
If possible, becoming more active in rental and business activities (including those conducted
through partnerships and S corporations) will convert these activities from passive to
nonpassive by meeting one of the material participation standards.
Standard and itemized deductions
By acting now, before December 31, taxpayers can maximize opportunities to reduce taxable
income, whether itemizing deductions or claiming the standard deduction.
What’s new?
• Temporary suspension of the AGI percentage limitations for charitable contribution
deductions expired on December 31, 2021.
• The temporary charitable contribution deduction for nonitemizers also expired on
December 31, 2021.
• Deductible out-of-pocket educator classroom expenses now include those for personal
protective equipment, disinfectant, and other supplies used for the prevention of the
spread of COVID-19.
Non-itemized deduction: charitable contributions
For 2022, there is no non-itemized deduction for charitable contributions. Individuals who want
to deduct charitable contributions must itemize.
Above-the-line deductions: educator expenses
Eligible educators can deduct up to $300 of unreimbursed qualified expenses. Eligible
educators are K-12 teachers, instructors, counselors, principals, or aides who worked at least
900 hours during a school year in a school providing elementary or secondary education. If both
taxpayers on a joint return are eligible educators, each can deduct up to $300 of qualified
expenses, for a maximum deduction of $600.
Eligible purchases include items such as books, supplies (athletic supplies for courses of
instruction in health or physical education), computer equipment (including related software and
services), other equipment and supplementary materials used in the classroom, and personal
protective equipment, disinfectant, and other supplies used for the prevention of the spread of
COVID-19. Supplies purchased to facilitate online instruction are also eligible. Professional
development expenses qualify for the deduction when they’re related to either the curriculum in
which the teacher provides instruction or the students for whom they provide instruction.
Above-the-line deductions: health savings accounts
Individuals or employees who were covered by a high-deductible health plan at any time during
the year and make contributions to an HSA may be eligible for an above-the-line deduction. For
2022, the maximum deduction for an eligible individual with self-only coverage under an HDHP
is $3,650. For an individual with family coverage under an HDHP, the limit is $7,300. Individuals
who are age 55 or older can make catch-up contributions in addition to their regular
contributions for the year. The annual catch-up contribution limit is $1,000.
Becoming eligible in December can salvage a contribution for the entire year. For computing the
annual HSA contribution, taxpayers who are eligible individuals in the last month of the tax year
are “deemed eligible” during every month of that year. Thus, they can make contributions for
months before they enrolled in an HDHP.
Caution: A taxpayer who contributes to an HSA under the “deemed eligible”
rule must remain eligible during the entire testing period (a 12-month period
beginning with the last month of the tax year). Otherwise, any contributions
made during a month when the taxpayer was “deemed eligible” are includible
in gross income and subject to a 10% penalty tax.
Taxpayers may make contributions at any time before the contribution deadline, which is the
due date (without extensions) for filing the individual’s return for the year of the contribution.
Observation: A distribution that is not used to pay qualified medical expenses
is includable in the gross income of the account holder. In addition, such a
distribution generally is subject to an additional 20% tax. However, the 20%
penalty tax does not apply to distributions made on account of death or
disability or after the account holder reaches age 65. HSA contributions can
also be used to pay for qualified expenses of a spouse or dependent who is
not covered by the HDHP.
Itemized deductions: charitable contributions
Individuals may deduct contributions to charitable organizations up to a certain percent of their
“contribution base” (generally, AGI). For 2022, that percentage is 60% for cash contributions
and 30% for noncash contributions.
For year-end planning, it’s beneficial to review whether an individual has charitable contribution
carryovers from a prior year. If income will decline, care should be taken to use the carryovers
before they expire.
An individual with low basis, highly appreciated stock may want to consider funding a charitable
remainder trust with the stock. The trust can sell the stock without incurring any income tax and
make distributions over time to the current individual beneficiary (or beneficiaries) that will be
taxed at the then-current rates in the years of distribution. The donor can also claim a charitable
deduction in the year the trust is funded, equal to the value of the charitable remainder interest,
subject to limitations.
Itemized deductions: medical expenses
A taxpayer can deduct medical expenses only to the extent the expenses exceed 7.5% of AGI.
When the taxpayer expects to have expenses this year and next, it’s important to determine
whether bunching the expenses into either 2022 or 2023 can help ensure the taxpayer exceeds
the deduction threshold in at least one of the two tax years. Similarly, for a taxpayer who
expects to itemize deductions in either 2022 or 2023, but not both years, bunching expenses
into the itemizing year can achieve tax savings.
Observation: One way to maximize the benefit of deductions is “bunching” –
deferring or accelerating deductions into a single tax year in order to exceed
the standard deduction or other thresholds. Bunching can be especially
beneficial for taxpayers subject to the alternative minimum tax (AMT). A
taxpayer who is subject to the AMT gets no benefit from the standard
A taxpayer might accelerate expenses by buying new prescription eye wear now and/or having
orthodontic work done before the end of the year instead of putting it off until January, or paying
any unpaid medical or dental bills before the end of the year. A taxpayer generally can’t deduct
payments made this year for services that will be performed next year or later. However, special
exceptions apply for (1) certain entrance fees to life care facilities allocable to medical care and
paid in connection with obtaining lifetime care, and (2) certain medical insurance premiums paid
by a taxpayer who is under 65 during the tax year for insurance covering medical care for the
taxpayer, spouse, or dependent after the taxpayer reaches 65.
Observation: Careful timing of year-end payments remitted by credit card or
check can yield tax savings. Eligible medical expenses remitted by credit card
before the end of the year are deductible on this year’s return, even if the
taxpayer isn’t billed for the charge until January. If a taxpayer pays by check
dated and postmarked no later than December 31, it will count as a payment
incurred this year even if the payee doesn’t deposit the check until January 1
or later (assuming that the check is honored when first presented for
Taxpayers can deduct medical expenses paid for medical dependents, subject to the overall
AGI floor. The test for determining whether an individual qualifies as a dependent for medical
deduction purposes is less stringent than that used to determine whether an individual is a
dependent for other tax purposes.
Recommendation: To ensure that medical expenses paid for dependents will
be allowed, the taxpayer should be prepared to prove the amount of support
provided. Advising clients on best practices for documenting expenses and
support will ensure a smoother tax season and fewer hassles down the road.
The taxpayer can deduct medical expenses paid for a medical dependent even if the dependent
received gross income of $4,400 or more, filed a joint return, or if the taxpayer (or spouse if filing
jointly) could be claimed as a dependent on someone else’s return.
Illustration: Gabi contributed more than half of her mother’s support during the
tax year. She anticipates that her own medical expenses will exceed 7.5% of
her AGI, and that she will be able to itemize her deductions. In December, her
mother incurs substantial medical expenses. If Gabi’s mother will not receive
any tax benefit from these expenses, Gabi should consider paying the medical
bills directly before year end. Gabi can then add these expenses to her own
medical expenses when calculating the deduction on her return.
Itemized deductions: state and local taxes
Taxpayers who itemize their deductions can deduct certain taxes paid to state and local
governments. However, through 2025, the Tax Cuts and Jobs Act limits the state and local tax
(SALT) deduction to $10,000 ($5,000 for marrieds filing separately). The SALT deduction cap
applies to the aggregate deduction for nonbusiness state and local taxes including real and
personal property taxes, income taxes, and (by election) general sales taxes.
Observation: Generally, deductions for state and local business taxes are not
subject to the limit–that is, taxes deducted on an individual’s Schedule C
(Profit or Loss from Business); Schedule E (Supplemental Income and Loss);
or Schedule F (Profit or Loss from Farming) (i.e., paid or accrued in carrying
on a trade or business or in connection with the production of income).
However, property taxes included in a home office deduction are subject to
the SALT cap.
Taxpayers with fluctuating income should try bunching their SALT payments, itemizing their
deductions in one year and taking the standard deduction in the next. For this strategy to work,
however, the tax must have been assessed before the payment is made (as determined by the
state or local jurisdiction).
Taxpayers can elect to deduct sales and use tax in lieu of income taxes. Accelerating the
purchase of a big-ticket item into this year is a good way to achieve a higher itemized deduction
for sales taxes.
Taxpayers who are paying or saving for their own or their dependents’ education have several
opportunities to maximize education-related tax benefits before year-end.
What’s new?
• For tax years 2021-2025, discharges of many public and private student loans are
excluded from gross income.
AOTC or Lifetime Learning Credit
There are two credits that taxpayers can claim to offset the cost of education: the AOTC and the
Lifetime Learning Credit. Both credits phase out for higher-income taxpayers.
AOTC is a credit for qualified education expenses paid for an eligible student for the first four
years of higher education. The maximum annual AOTC is $2,500 per eligible student and it is
refundable up to $1,000.
The Lifetime Learning Credit is a credit up to $2000 per return for qualified tuition and related
expenses paid for eligible students enrolled in an eligible educational institution. This includes
undergraduate, graduate, and professional degree courses, and courses to acquire or improve
job skills. There is no limit on the number of years a taxpayer can claim this credit.
Taxpayers can claim credits for eligible expenses paid for education that begins this year or
during the first three months of next year. A taxpayer who hasn’t already maximized education
credits for the student this year should consider making the spring tuition payment before yearend.
Caution: If educational expenses paid and deducted in 2021 are refunded in
2022, be mindful of the tax benefit rule–the taxpayer may need to include the
benefit amount in income this year, even if the student is no longer the
taxpayer’s dependent.
Student loan interest deduction
Interest paid on a qualified student loan is deductible up to $2500 per return, except for married
taxpayers filing separate returns, for whom it is denied. This deduction phases out at higher
income levels. Taxpayers who might fall within the phase out range for the student loan interest
deduction this year should try to shift income to next year so that their current-year income falls
below the phase-out threshold.
Student loan interest deductions might be lower this year for some taxpayers due to COVID-19
relief that reduced the interest on certain student loans to 0% and suspended certain student
loan payments. Taxpayers should consider whether making additional student loan payments
before December 31 will enable them to fully utilize the student loan interest deduction.
The allocation of payments between principal and interest for purposes of the deduction may
not match the allocation stated on Form 1098-E from the lender or loan servicer. A taxpayer
may be able to claim a deduction for payments allocated to principal by the lender to the extent
the payments represent unpaid capitalized interest. For tax purposes, a payment generally
applies first to stated interest that remains unpaid as of the date the payment is due, second to
any loan origination fees allocable to the payment, third to any capitalized interest that remains
unpaid as of the date the payment is due, and fourth to the outstanding principal.
Savings bonds
If certain requirements are met, an individual who redeems Series EE bonds issued after 1989
or Series I bonds may exclude all or part of the interest income on those bonds that would
otherwise be taxable, to the extent used to pay the cost of attending college, vocational school,
or other post-secondary educational institution (for the individual, a spouse, or a dependent).
The exclusion phases out above a specified income threshold.
Caution: The interest exclusion applies only to bonds issued after the
individual has reached age 24. Interest on a bond bought by a parent and
issued in the name of their child under age 24 can’t be excluded by either the
parent or child.
As year-end approaches, consider paying next year’s costs in advance if the costs paid during
the year are less than the savings bond redemption proceeds during the year. For taxpayers
planning to contribute to a 529 plan this year, consider redeeming bonds up to the contemplated
contribution amount.
For clients planning to buy bonds as a year-end gift, consider feasibility of gifting cash to the
parent of the child to enable the parent to buy the bonds in the parent’s name. That way, if the
bonds are redeemed to pay for the child’s education, the exclusion may be available depending
on the parents’ income situation at redemption time.
Coverdell and 529 Plans
A 529 plan, also known as a qualified tuition plan, is a tax-advantaged savings plan designed to
encourage saving for education costs. 529 plans are sponsored by states, state agencies, or
educational institutions and contributions to such plans are considered completed gifts for
federal gift tax purposes.
Observation: Although the Code doesn’t limit annual contributions to 529
plans, each state has aggregate limits per beneficiary.
529 plans enable participants to prepay tuition costs for a particular beneficiary or contribute to
an education savings account established to pay a beneficiary’s elementary and secondary
tuition and higher education expenses, certain apprenticeship programs, and up to $10,000 of
student loan debt.
Taxpayers may also contribute up to $2,000 annually to a tax-exempt Coverdell Education
Savings Account (Coverdell ESA) for an individual under age 18 (and special needs
beneficiaries of any age). The maximum contribution is reduced ratably for modified AGI
between $190,000 and $220,000 for joint filers, and between $95,000 and $110,000 for others.
Disaster losses
Taxpayers with disaster losses in the current tax year need to determine whether to take them
on this year’s return or elect to deduct them in the immediately preceding year.
What’s new
Federally declared disasters for 2022 include Hurricane Ian, Hurricane Fiona, and several other
storms, floods and wildfires.
Federally declared disasters
For 2018-2025, individuals are not allowed to deduct personal casualty losses unless they are
attributable to a federally declared disaster. A taxpayer may elect to deduct a disaster loss in the
tax year before the year the loss occurred, instead of in the year the loss occurred (the
“preceding year disaster loss deduction”). A disaster loss is a loss that occurs in a disaster area
and is attributable to a federally declared disaster.
Observation: A non-casualty loss may be a disaster loss if incurred in the
course of a trade or business or profit-seeking transaction.
Deducting disaster losses in the prior year
Net disaster losses of individuals are allowed as an addition to the standard deduction, subject
to the $500 per-casualty floor, but exempt from the 10%-of-AGI limitation.
An election to deduct a disaster loss for the year before the year in which the loss occurs is
made on an original return or an amended return for the preceding year. The original return or
amended return must be filed on or before six months after the original due date for the
taxpayer’s return for the disaster year. So, a calendar-year taxpayer who suffers a disaster loss
in 2022 has until October 16, 2023 (because October 15 is a Sunday), to file an original or
amended 2021 return to deduct the loss for 2021.
Earned income tax credit
The earned income tax credit (EITC) is determined based on a taxpayer’s earned income from
wages and other sources.
What’s new?
• For 2022, the maximum earned income credit is $6,935 for those with three or more
qualifying children.
• The amount of earned income on which the earned income tax credit will be computed is
$7,320 for taxpayers with no qualifying children, $10,980 for taxpayers with one
qualifying child, and $15,410 for taxpayers with two or more qualifying children.
• For 2022, the phaseout of the allowable earned income tax credit will begin at $15,290
for joint filers with no qualifying children ($9,160 for others with no qualifying children),
and at $26,260 for joint filers with one or more qualifying children ($20,130 for others
with one or more qualifying children).
• The amount of disqualified income (generally investment income) a taxpayer may have
before losing the entire earned income tax credit is $10,300 for 2022.
• The under-65 maximum age limit for claiming the credit, for those who don’t have a
qualifying child, is reinstated for 2022.
Maximum EITC amount
An eligible individual is allowed an EITC equal to the credit percentage of earned income (up to
an “earned income amount”) for the tax year, subject to a phaseout. The maximum EITC for
2022 is $560 (for taxpayers with no qualifying children), $3,733 (one qualifying child), $6,164
(two qualifying children), and $6,935 (three or more qualifying children).
Disqualified income
A taxpayer may earn up to $10,300 of disqualified income in 2022 and still qualify for the EITC.
Caution: The $10,300 limit is a cliff, and there is no phase-out range. A
taxpayer who earns $10,301 of disqualified income is denied the EITC
Disqualified income is, essentially, investment income along with rents and royalties not derived
from a trade or business, and includes:
• interest or dividends included in gross income;
• tax-exempt interest;
• net income from nonbusiness rents or royalties;
• capital gain net income for the year (but not Code Sec. 1231 gains); and
• net income from passive activities
Taxpayers who believe they could have greater than $10,300 of disqualified income in 2022
should attempt to reduce or postpone receiving payments until 2023.
Illustration: Mary, an individual who would otherwise be eligible for the EITC
owns a building with three apartments. She lives in one unit and rents the
other two out for $900 each per month. She has $11,000 in deductible
expenses associated with the units. If Mary rents out each unit for all 12
months of the year, she will have $10,600 in disqualified income (($900 x 2 x
12) – $11,000) and will not be able to take the EITC.
If Mary cuts the rent from $900 $885, she will only have $10,240 in
disqualified income (($885 x 2 x 12) – $11,000) and will qualify for the credit.
Alternatively, taxpayers may try to postpone items of disqualified income until 2023. However,
they should be careful that their strategy is not foiled by the constructive receipt doctrine.
Proposed retirement plan reform (commonly known as SECURE Act 2.0.) could include:
automatic enrollment in retirement plans; an increase in required minimum distribution age
beginning date (to age 75 according to one Senate plan); enhancements to the age 50+ catchup contribution provisions; creating an online “lost and found” for long-forgotten pension
benefits; and modified rules to allow SIMPLE IRAs to accept Roth contributions.
The required minimum distribution (RMD) rules apply in 2022. Under current law, individuals
who turned 72 in 2022 must take their first distribution by April 1, 2023. Older plan participants
must take their RMDs by the end of 2022. Individuals are not required to take RMDs from Roth
Caution: Those turning 72 this year who wait until next year to take their first
RMD must take a second one by the end of 2023, possibly subjecting them to
a higher tax rate. (Also, see NIIT considerations, below.)
Contributing to tax-advantaged accounts
A special rule allows taxpayers to deduct certain retirement savings contributions made after
year-end. Under this rule, a contribution is treated as made on the last day of the tax year if (a) it
is identified as being made for that year, and (b) it is made by the due date of the taxpayer’s
return, including extensions.
Caution: A qualified retirement plan generally must legally exist by the
taxpayer’s year-end to claim a deduction for the post-year-end contribution.
Post-year-end traditional IRA contributions are deductible in the prior year if the IRA is
established by the tax return due date, without extensions, and the contribution is made by that
Proposed retirement plan changes
Under certain versions of pending legislation that would be effective for tax years beginning
after 2022, employers would be able to treat student loan payments as elective deferrals for
purposes of matching contributions. It could also increase the catch-up limit to $10,000 for
retirement plan participants 60 and over ($5,000 for SIMPLE plans). These limits would be
indexed for inflation. In addition, IRA owners over age 50 would index the $1,000 catch up
contribution currently allowed.
Net investment income tax considerations
Converting a traditional IRA to a Roth IRA will increase modified AGI, and potentially expose
income (or more income) to the 3.8% NIIT. If possible, time year-end conversions to keep MAGI
below the applicable NIIT threshold. If other net investment income will be lower next year,
consider delaying the conversion.
For NIIT purposes, investment income doesn’t include distributions from tax-favored retirement
plans, such as qualified employer plans and IRAs. However, taxable distributions from these
plans, including RMDs, are included in MAGI, potentially exposing other investment income to
the extra tax. Taxpayers nearing the MAGI threshold, or who already exceed it because of other
income, may have an RMD planning opportunity. The first RMD can be taken without penalty as
late as April 1 of the year following the year the participant reaches age 72 (or, if older, retires).
The additional distribution may cause the taxpayer to be in a higher tax bracket or become
subject to the 3.8% NIIT. However, when making the two RMDs in separate years causes both
years to be adversely affected, rather than just one, consider delaying the first distribution into
the second year if that doesn’t result in it being taxed at a higher rate.
Gift and estate tax
Besides the typical year-end estate planning considerations, substantial proposed estate tax
legislative changes could come into effect in 2023, requiring reevaluation of many estate plans.
What’s new?
The annual gift tax exclusion, now $16,000, will increase to $17,000 in 2023.
Annual gift tax exclusion
For 2022, up to $16,000 of gifts made by a donor to each donee is excluded from the amount of
the donor’s taxable gifts. The exclusion increases to $17,000 in 2023. A gift that qualifies for the
exclusion is not subject to gift tax or Generation-Skipping Transfer Tax.
Unused annual exclusions can’t be carried over and are forever lost. It is best to make
exclusion-eligible gifts as early as possible so as not to lose any of their benefit.
But, a married couple could, for example, gift another married couple up to $64,000 and still
qualify for the exclusion under the split gift rule.
Illustration: Alex and Eliza are married. Alex transfers $32,000 to their adult
child, George. If Eliza agrees to split the gift, the $32,000 will be treated as if
Alex and Eliza each individually gave $16,000 to George. If George is also
married, Alex or Eliza could also transfer $32,000 to George’s spouse and
treat that transfer as a split gift qualifying for the exclusion.
Recommendation: If a gift is made by check near the end of the year and the
donor wants to qualify for this year’s exclusion, the donee should deposit the
check before year-end so there’s no doubt as to when the gift was made.
Gifting income-producing or appreciated property
The donor and donee can realize overall income tax savings when income-earning property is
given to a donee who is in a lower income tax bracket than the donor or who is not subject to
the NIIT. Estate tax can also potentially be saved because both the value of the gift on the date
of transfer and its post-transfer appreciation (if any) are removed from the donor’s estate.
Income can also be shifted to lower-bracket family members by giving them appreciated
property to be sold by them at a gain. A valid gift of property that is completed before the
property is sold generally shifts the tax liability on the gain from donor to donee, subject to
Kiddie Tax rules.
Tuition and medical expenses
Tuition payments made directly to an educational institution and medical expenses paid directly
to a medical care provider are exempt from gift and Generation-Skipping Transfer (GST) tax.
These payments don’t count toward the annual gift tax exclusion amount or lifetime unified
credit and the donor does not need to file a gift tax return to report the gift.
For this purpose, primary, secondary, preparatory schools, high schools, colleges, and
universities are considered “educational institutions.” The tuition gift tax exclusion applies to
payments for “tuition” only and not for other educational expenses such as books, supplies, and
room and board. A donor might want to consider making tuition payments directly to the
educational institution while using the $16,000 ($17,000 in 2023) annual exclusion to make a
direct gift to the student, or a contribution to a 529 plan, to cover additional expenses such as
books, supplies and room and board.
An alternative for those willing and able to make larger current gifts is to elect to take advantage
of the special rule for “superfunding” a 529 plan (and certain other tuition programs), and make
contributions to a 529 plan that exceed the annual gift tax exclusion into account ratably over a
five-year period starting with the calendar year of the contribution, thus allowing a $80,000 gift
made in 2022 ($85,000 in 2023) to qualify for annual exclusions.
Regarding medical expense gifts, note that the definition of medical care is broad and includes
medical insurance. However, payments to medical providers for cosmetic surgery don’t qualify
for the exemption unless the surgery corrects a birth defect or disfigurement from injury or
Gifts to minors
The annual exclusion for gifts applies only in the case of “present interests,” which can be tricky
when dealing with gifts to minors. However, a gift to a minor will be considered a present
interest (and qualify for the exclusion) if the gifted property, and all the income generated by the
property, may be spent for the minor’s benefit before reaching age 21 and any amount not spent
by then will go to the minor upon reaching age 21.
Observation: Gifts to minors may be made through custodians designated
under the Uniform Transfers to Minors Act (and predecessor acts) as adopted
by various states. Such gifts generally qualify for the annual exclusion.
Effect of the kiddie tax
The “kiddie tax” can limit tax savings from intrafamily gifts of income-producing property. Under
the kiddie tax rules, a child pays tax at the trust and estate marginal rate on the child’s unearned
income over the kiddie tax exemption amount ($2,300 for 2022; $2,500 for 2023) if that tax is
higher than the tax the child would otherwise pay on the income. Alternatively, the parent can
elect in some cases to include the child’s income on the parent’s return.
Children 18 and older can increase their earned income to exceed more than half of their
support and thus avoid the kiddie tax on their unearned income. This does not apply for children
under age 18. Also note that in all cases, the child’s earned income can be sheltered by the
child’s standard deduction and other deductions, and earned income in excess of those
deductions will be taxed at the child’s tax rate.
Election by complex trusts and estates
Complex trust and estate distributions made within the first 65 days of the year may electively
be treated as paid and deductible in the prior year. Thus, fiduciaries can wait until next year to
decide whether the payments may be more profitably imputed back to 2022 via the 65-day rule
or treated as 2023 payments. If an entity elects to treat a 2023 distribution as paid in 2022, the
distribution is taxable to the beneficiary in 2022. The election doesn’t have to be made for the
entire amount distributed; it can apply to only part of the amounts distributed to a beneficiary.
Proposed estate tax changes
Pending legislation could make some significant changes to estate and gift taxes effective after
One proposed change would make the transfer by gift or bequest of appreciated assets with
unrealized gains a “realization event” for tax purposes and tax the transfer as if the underlying
property was sold. In addition, such property transferred by gift or held at death would be
subject to a $5 million lifetime exclusion for a single filer. Unrealized capital gains in appreciated
assets would also be taxed if they were transferred into or distributed in kind from an irrevocable
trust, partnership or other noncorporate entity if the transfer was effectively a gift to the recipient.
There are also proposed changes to the rules for donor advised funds (DAFs), grantor retained
annuity trusts (GRATS), the way promissory notes are valued when selling appreciated property
to a grantor trust and limits to the generation-skipping transfer (GST) exemption that would limit
the GST exemption to direct skips no more than two generations from the grantor.
Year-End Tax Planning for 2022: Businesses
What’s new for businesses in 2022?
Congress passed the Inflation Reduction Act of 2022 which extends, through 2024, the credit for
electricity produced from certain renewable resources; the energy credit; and other energyrelated credits (with various extension dates)
The Act also introduces two new corporate taxes and various new clean energy related tax
credits. But these will not go into effect until 2023. The two corporate taxes are: (a) the 15%
corporate alternative minimum tax on the adjusted financial statement income of applicable
corporations (sometimes referred to as the “Book Minimum Tax”) and (b) the 1% excise tax on
the repurchase of corporate stock.
Cash vs. accrual method
Any entity, other than a tax shelter, that meets an inflation-adjusted average annual gross
receipts test ($27 million for tax years beginning in 2022; estimated $29 million for 2023) can
use the cash method of accounting. A C corporation that is a qualified personal service
corporation (PSC) is also allowed to use the cash method, regardless of average annual gross
receipts, provided it does not maintain inventories for tax purposes. Use of the cash method
provides year-end planning opportunities for shifting income and deductions with an eye to tax
savings. Taxes can easily be deferred by (a) postponing billings until next year, and (b)
accelerating deductible expenditures into this year subject, however, to the passive activity
limitations and the at-risk rules.
Although income-deferral and deduction-acceleration are standard year-end tax planning
strategies, this year may favor doing the opposite if Congress were to consider raising the top
individual, capital gain, and corporate tax rates. If changes like those were enacted, accelerating
income into this year might subject it to a lower tax rate, and deferring deductions into next year
could allow them to be taken against higher taxed income.
For cash method taxpayers, business expenses are generally deductible when paid. To
increase recognition of expenses for the current year, these taxpayers should consider paying
invoices received before year-end, and even prepaying some expenses where feasible.
However, a business that could be subject to increased rates next year might want to defer
expense payments until then, where feasible from a business standpoint. Note, however, that
some prepayments made by cash method taxpayers, such as prepaid compensation, must be
prorated over the period to which they apply.
Acceleration of expenses is more difficult for accrual method taxpayers. For them, expenses
generally aren’t deductible until property is delivered or services are performed. This may be
advantageous, however, if tax rates are higher next year, in which case businesses may want to
delay some deliveries, or performance of some services. However, prepaid expenses may be
deductible in the current year under certain circumstances. For example, when the taxpayer
reasonably expects the property or services to be provided or performed within 3.5 months after
making the payment, or when the recurring item exception applies, generally when economic
performance occurs within 8.5 months after the close of a tax year. The recurring item exception
must be consistently applied for a type of item or all items from one year to the next, so it is
unlikely that IRS would approve a switch from that method to generate a short-term tax
advantage, and, in any event, businesses may not want to forego its advantages permanently.
For ratable service contracts, taxpayers can treat economic performance as occurring on a
ratable basis over the term of the service contract when certain conditions are met.
The timing of year-end bonus payments is an area where both cash- and accrual-basis
employers have some opportunity to time deductions. Cash-basis employers deduct bonuses in
the year they are paid, so they can time the payment for maximum tax effect. Accrual-basis
employers, on the other hand, deduct a bonus in the accrual year, when all events related to it
are established with reasonable certainty. However, the bonus must be paid within 2.5 months
after the end of the accrual employer’s tax year for the deduction to be allowed in the earlier
year. Accrual employers looking to defer deductions to a higher-taxed future year should
consider changing their bonus plans before year-end to set the payment date later than the 2.5-
month window or change the bonus plan’s terms to make the bonus amount not determinable at
year end.
Depreciation and expensing
Acquiring qualifying property and placing it into service before year-end can result in a full
expensing or bonus depreciation deduction for 2022. However, there are many considerations
when planning year-end purchases. An important one is the possibility of increased tax rates
next year, which may make deferring deductions more beneficial.
Bonus depreciation
Through 2022, a 100% first-year deduction for the adjusted basis of depreciable property is
allowed for qualified property acquired and placed in service during the year. Qualifying property
includes tangible property depreciated under MACRS with a recovery period of 20 years or less,
most computer software, qualified film, television, and live theatrical productions, and water
utility property. Possible higher tax rates next year might make some businesses want to defer
placing bonus-depreciation-eligible property into service until next year, or to opt out of bonus
depreciation on their tax return for this year.
What’s New?
For 2022, the maximum amount of section 179 property that can be expensed is $1,080,000.
That full amount is available until qualifying property placed in service during the year reaches
$2,700,000, at which point a phase out begins.
The 100% bonus depreciation stays in effect until January 1, 2023. At that point, the first-year
bonus depreciation deduction decreases as follows:
• 80% for property placed in service during 2023
• 60% for property placed in service during 2024
• 40% for property placed in service during 2025
• 20% for property placed in service during 2026
Section 179 expensing
Taxpayers (other than estates, trusts, and certain noncorporate lessors) can also elect to deduct
expenses for the cost of eligible property placed in service in the taxpayer’s trade or business
during the tax year, subject to limitations.
Property eligible for expensing includes:
• Tangible Code Sec. 1245 property (generally, machinery and equipment), depreciated
under the MACRS rules, regardless of its depreciation recovery period;
• Off-the-shelf computer software;
• Qualified improvements to building interiors;
• Roofs, HVAC systems, fire protection systems, alarm systems, and security systems.
The eligible property can be new or used.
For 2022, the maximum amount of section 179 property that can be fully expensed is
$1,080,000. That limit phases out dollar-for-dollar once the amount of section 179 property
placed in service during the tax year exceeds $2,700,000 (complete phase-out at $3,780,000 of
expense-eligible property placed in service).
Businesses have much flexibility in choosing whether to elect expensing in response to possible
late year legislation. The election can be made or revoked as late as the due date for filing an
amended return for the election year.
Business interest deductions
The Internal Revenue Code limits the deduction of business interest expenses. The deduction
limit on business interest doesn’t apply to businesses with 3-year average gross receipts of $27
million or less for 2022 ($29 million or less for 2023). The limitation also does not apply to
deductions for interest paid by vehicle dealers on carried inventory. In addition, some real estate
related businesses can opt out of the limitation, if they forego accelerated depreciation. Interest
that can’t be deducted due to the limitation is carried forward indefinitely.
What’s new?
• Two changes made by the Tax Cuts and Jobs Act became effective on January 1, 2022.
First, businesses are required to amortize research and development expenses over a
five-year period. Second, the limitation on business net interest deduction is reduced to
30% of earnings before interest and taxes (EBIT) instead of earnings before interest,
taxes, depreciation, and amortization (EBITDA).
Qualified business income deduction
Through the end of 2025, eligible taxpayers can deduct up to 20% of qualified business income
(QBI) from a domestic sole proprietorship, partnership, S corporation, trust, or estate, and up to
20% of the combined qualified real estate investment trust (REIT) dividends and publicly traded
partnership income (PTP) of the taxpayer. The combined deduction cannot exceed 20% of the
excess of the taxpayer’s taxable income over net capital gain for the year. Trades or businesses
involving the performance of services in fields of health, law, accounting, actuarial science,
performing arts, consulting, athletics, financial services, brokerage services, or any trade or
business whose principal asset is the reputation or skill of one or more of its employees or
owners do not qualify for the QBI deduction unless the individual taxpayer’s income is below a
phase-out threshold.
For 2022, specified service businesses qualify for the QBI deduction if their taxable income is
less than $340,100 for married filing joint returns, $170,050 for married filing separate returns,
or $170,050 for single and head of household returns. The deduction phases out ratably over
the next $50,000 of taxable income over the thresholds ($100,000 phaseout for joint return
Year-end strategies
Taxpayers with income near the threshold for this year may benefit from accelerating
deductions or deferring income, to the extent possible, so their taxable income falls below the
threshold. Similarly, if the taxpayer is well below the threshold this year but expects to exceed it
next year, consider options to pull more income into 2022. This could have the added benefit of
lower tax on the accelerated income in the event of higher tax rates next year.
Net operating losses
Changes to the NOL deduction in 2021 as well as other recent-year changes impact year-end
planning opportunities and strategies.
Some recent changes to the NOL deduction and carryback rules are worth noting:
• 2018, 2019, and 2020 NOLs may be carried back five years and carried forward
indefinitely; and
• Post-2020 NOLs may not be carried back (except for farm losses, which may be carried
back two years), but may be carried forward indefinitely.
• Starting with the 2021 tax year, the NOL deduction is subject to an 80% of taxable
income limitation (not counting the NOL or the qualified business income deduction)
NOLs from before 2018 could be carried back two years and carried forward only 20 years.
What this boils down to is that for earlier tax years, NOL carryovers and carrybacks could fully
offset taxable income, but unused losses couldn’t be carried forward indefinitely. Starting with
the 2021 tax year, deductions for NOLs generated after 2017 are limited by the 80% standard,
but unused losses may be carried forward indefinitely.
NOL carryforwards of noncorporate taxpayers are increased by their nondeductible “excess
business losses,” which are, with many modifications, the excess of the taxpayer’s aggregate
trade or business deductions for the tax year over its aggregate gross business income or gain
plus $250,000 ($500,000 for joint return filers), as adjusted for inflation.
Making the most of NOLs
A taxpayer that may have difficulty taking advantage of the full amount of an NOL carryforward
this year should consider shifting income into and deductions away from this year. By doing so,
the taxpayer can avoid the intervening year modifications that would apply if the NOL is not fully
absorbed in 2022. This may also avoid potentially higher tax rates next year on the accelerated
income and increase the tax value of deferred deductions.
When to avoid an NOL
A corporation (other than a large corporation) that anticipates a small NOL this year and
substantial net income next year may find it worthwhile to accelerate just enough of its 2023
income (or to defer just enough of its 2022 deductions) to create a small amount of net income
for this year. This will permit the corporation to base its estimated tax installments next year on
the lower amount of income shown on its 2022 return, rather than having to pay estimated taxes
based on 100% of its much higher 2023 taxable income.
Partnership and S corporation losses
Losses and shareholder or partnership basis
A shareholder can deduct its pro rata share of S corporation losses only to the extent of the total
of its basis in the S corporation stock and debt. This determination is made as of the end of the
S corporation tax year in which the loss occurs. Any loss or deduction that can’t be used on
account of this limitation can be carried forward indefinitely. If a shareholder wants to claim a
2022 S corporation loss on its own 2022 return, but the loss exceeds the basis for its S
corporation stock and debt, it can still claim the loss in full by lending the S corporation more
money or by making a capital contribution by the end of the S corporation’s tax year (in the case
of a calendar year corporation, by December 31).
Similarly, a partner’s share of partnership losses is deductible only to the extent of their
partnership basis as of the end of the partnership year in which the loss occurs. Basis can be
increased by a capital contribution, or in some cases by the partnership itself borrowing money
or by the partner taking on a larger share of the partnership’s liabilities before the end of the
partnership’s tax year.
Passive activity limitations
The impact of the passive activity loss limitation rules must also be considered. Limited partners
always have passive activity interests except to the extent IRS regs say otherwise. If an
individual who is a limited partner meets the material participation test under the 500-hours-ofparticipation rule, the five-of-ten-years-of-material-participation rule, or the any-three-prior-yearmaterial-participation rule for a personal service activity, the partner is treated as materially
participating in any activity of the limited partnership. This will affect the application of the
passive activity rules to their share of any income, gain, loss, deduction, or credit attributable to
the limited partnership interest and to any gain or loss from the activity recognized on the sale or
exchange of the interest.
Year-end Tax Planning for 2022: Practice Aids
Extenders and expiring provisions 2022
Provisions that expired at the end of 2021 (and have not been extended into 2022 as of time of
• Mortgage insurance premium deduction
• Health coverage tax credit
• CARES Act charitable deduction for nonitemizers (with modifications)
• The increased income limit for charitable deductions for itemizers
• Computation of adjusted taxable income without regard to any deduction allowable for
depreciation, amortization, or depletion (business interest deduction limitations)
• Three-year depreciation for racehorses two years or younger
• Accelerated depreciation for business property on an Indian reservation
• American Samoa Economic Development Credit
• Indian Employment Tax Credit
• Mine Rescue Team Training Credit
• 12.5% increase in annual LIHTC authority
• Payroll tax credits for COVID-19 sick and family leave
• Employee Retention Credit
• Prevention of partial plan termination
Provisions extended through December 31, 2024, via the Inflation Reduction Act of 2022:
• Credit for electricity produced from certain renewable resources
• Energy credit
• Other energy-related credits (with various extension dates)
Provisions recently extended through December 31, 2025:
• CARES Act exclusion for employer payments of student loans
• Exclusion for canceled mortgage debt
• New Markets Tax Credit
• Work Opportunity Credit
• Empowerment Zone Tax Incentives
• Employer Credit for paid family and medical leave
Provisions recently made permanent:
• 7.5% floor for the medical expense deduction
• Exclusion of benefits for volunteer firefighters and emergency medical responders
• Business tax extender provisions
• Credit for certain expenditures for maintaining railroad tracks
Year-End Tax Planning Checklist for Individuals
• Determine whether the client’s marital status has changed during the year. Has there
been a change in the number of their dependents?
• High-income taxpayers must be careful of the 3.8% net investment income (NII) tax.
Taxpayers who may be subject to this tax should consider ways to minimize NII for the
remainder of the year by, for example, not selling stock or other investment property.
• Analyze capital gains. Should the client consider selling capital loss assets to shelter
capital gains? Also, remember individuals may deduct $3,000 a year in capital losses
against ordinary income.
• Clients should postpone income until next year and accelerate deductions into this year
if doing so will enable the client to claim larger claim larger deductions, credits, and other
tax breaks for this year that are phased out over varying levels of AGI. Postponing
income to next year also is desirable for taxpayers who anticipate being in a lower tax
bracket next year due to changed financial circumstances.
• In some cases, it may pay to accelerate income into 2022. For example, when a person
expects to be in a higher tax bracket next year or who will have a more favorable filing
status this year than next (e.g., head of household versus single filing status). This will
also apply to individuals who will be subject to a higher tax rate next year under pending
tax legislation.
• Clients interested in converting a traditional IRA to a Roth IRA should consider
converting traditional-IRA money invested in any beaten-down stocks (or mutual funds)
into a Roth IRA in the current year if eligible to do so. Keep in mind, however, that such
a conversion will increase AGI for the current year, and possibly reduce tax breaks
geared to AGI.
• Consider whether a client should defer a year-end bonus from an employer until next
year. Be careful of the doctrine of constructive receipt.
• Determine whether the client should take the standard deduction or itemize. It may be
advantageous to push itemized deductions into next year and take the standard
deduction this year. Be careful, though, many itemized deductions are disallowed:
o Miscellaneous itemized deductions are disallowed.
o Taxpayers can only deduct medical expenses to the extent they exceed 7.5% of
o No more than $10,000 of state and local taxes may be deducted.
o Personal casualty and theft losses are deductible only if they’re attributable to a
federally declared disaster and only to the extent the $100-per-casualty and
10%-of-AGI limits are met.
• Two temporary, COVID-related changes (that have now expired) to watch out for this
o Individuals may no longer claim a $300 ($600 on a joint return) adjustment for
cash charitable contributions.
o The percentage limit on charitable contributions is reduced to 60% of modified
• Consider whether to employ a bunching strategy to pull or push discretionary medical
expenses and charitable contributions (and SALT payments, if the limits are repealed)
into the year where they will do some tax good. Individuals could consider using a credit
card to pay deductible expenses before the end of the year. Under the cash method of
accounting, these expenses are deductible in the current year, even if the credit card bill
is paid after the end of the year.
• If the client has education expenses, did they take full advantage of the AOTC and
Lifetime Learning Credit? If not, consider trying to accelerate expenses into this year.
• The age at which taxpayers must begin taking RMDs from a 401(k) plan or IRA has
increased to 72. The requirement to take RMDs is back, as it was only suspended for
2020 and not 2021 and subsequent years.
• Taxpayers who are 70½ or older by the end of the year should consider whether to
make a charitable contribution (qualified charitable distribution, or QCD) from their
traditional IRA. QCDs are excluded from the taxpayer’s income but are not deductible.
However, the taxpayer may still claim the entire standard deduction.
• Review with clients the amount set aside for next year in their employer’s health FSA
and HSAs to ensure they’re able to fully utilize these amounts in 2022. Roll them over to
the next year to the extent necessary and possible.
• Make sure clients are taking full advantage of their annual gift tax exclusion ($16,000 for
2022), if they sometimes run up against (or exceed) this exclusion amount. Remember
this amount is per person, for both donors and donees. For example, a married couple
could give a married child and their spouse up to $64,000 (4 x $16,000) without incurring
gift tax.
• Consider whether to claim uninsured, unreimbursed casualty or theft losses related to a
federally declared disaster on this year’s return or on last year’s return. The client should
settle insurance or damage claims related to this disaster by year’s end to claim the
• For low-income clients, analyze the changes to the EITC to determine how the amounts
of and eligibility for the credit have changed.
• Review whether the client has any kiddie tax issues.
Year-End Tax Planning Checklist for Businesses
• Determine if a corporate client will be subject to the corporate alternative minimum tax in
2023 and plan accordingly if this looks likely.
• For clients other than C corporations, review issues related to the Qualified Business
Income deduction, with particular attention to where the client stands on the dollar
thresholds and amount of W-2 wages.
• If the client has placed less than $1,080,000 of section 179 property in service during the
year, consider whether to place more of such property in service to take full advantage
of the limits.
• Consider whether the client can take advantage of the 100% bonus depreciation
deduction. This write-off is available without proration, even if qualifying assets are in
service for only a few days in the current year.
• Consider purchasing items that qualify for the de minimis safe harbor (“book-tax
conformity”) election under the repair regs.
• Consider whether a corporate client that anticipates a small net operating loss (NOL) for
the current year and substantial net income next year may find it worthwhile to
accelerate just enough of next year’s income (or to defer just enough of its current
deductions) to create a small amount of net income for the current year. This will permit
the corporation to base its estimated tax installments for next year on the relatively small
amount of income shown on its current return, rather than having to pay estimated taxes
based on 100% of its much larger next-year taxable income.
• Consider whether the client can postpone cancellation of debt income by deferring a
debt-cancellation event until next year.
• If the client has a passive activity with suspended losses, consider disposing of the
activity before the end of the year to take the losses.
• Review business interest paid or incurred by the client to see if limitations apply.
Sample Year-End Planning Client Letter: Individuals
Dear Client:
With year-end approaching, it is time to start thinking about moves that may help lower your tax
bill for this year and next. This year’s planning is more challenging than usual due to recent
changes made by the Inflation Reduction Act of 2022 and the potential change in congressional
balance of power resulting from the midterm elections.
Whether or not tax increases become effective next year, the standard year-end approach of
deferring income and accelerating deductions to minimize taxes will continue to produce the
best results for all but the highest income taxpayers, as will the bunching of deductible
expenses into this year or next to avoid restrictions and maximize deductions.
If proposed tax increases do pass, however, the highest income taxpayers may find that the
opposite strategies produce better results: Pulling income into 2022 to be taxed at currently
lower rates, and deferring deductible expenses until 2023, when they can be taken to offset
what would be higher-taxed income. This will require careful evaluation of all relevant factors.
We have compiled a list of actions based on current tax rules that may help you save tax dollars
if you act before year-end. Not all of them will apply to you, but you (or a family member) may
benefit from many of them. We can narrow down specific actions when we meet to tailor a
particular plan for you. In the meantime, please review the following list and contact us at your
earliest convenience so that we can advise you on which tax-saving moves might be beneficial:
• Higher-income individuals must be wary of the 3.8% surtax on certain unearned income. The
surtax is 3.8% of the lesser of: (1) net investment income (NII), or (2) the excess of MAGI over a
threshold amount ($250,000 for joint filers or surviving spouses, $125,000 for a married individual
filing a separate return, and $200,000 in any other case).
• As year-end nears, the approach taken to minimize or eliminate the 3.8% surtax will depend on
the taxpayer’s estimated MAGI and NII for the year. Some taxpayers should consider ways to
minimize (e.g., through deferral) additional NII for the balance of the year, others should try to
reduce MAGI other than NII, and some individuals will need to consider ways to minimize both NII
and other types of MAGI. An important exception is that NII does not include distributions from
IRAs or most other retirement plans.
• The 0.9% additional Medicare tax also may require higher-income earners to take year-end
action. It applies to individuals whose employment wages and self-employment income total more
than an amount equal to the NIIT thresholds, above. Employers must withhold the additional
Medicare tax from wages in excess of $200,000 regardless of filing status or other income. Selfemployed persons must take it into account in figuring estimated tax. There could be situations
where an employee may need to have more withheld toward the end of the year to cover the tax.
This would be the case, for example, if an employee earns less than $200,000 from multiple
employers but more than that amount in total. Such an employee would owe the additional
Medicare tax, but nothing would have been withheld by any employer.
• Long-term capital gain from sales of assets held for over one year is taxed at 0%, 15% or 20%,
depending on the taxpayer’s taxable income. If you hold long-term appreciated-in-value assets,
consider selling enough of them to generate long-term capital gains that can be sheltered by the
0% rate. The 0% rate generally applies to net long-term capital gain to the extent that, when
added to regular taxable income, it is not more than the maximum zero rate amount (e.g.,
$83,350 for a married couple; estimated to be $89,250 in 2022). If, say, $5,000 of long-term
capital gains you took earlier this year qualifies for the zero rate then try not to sell assets yielding
a capital loss before year-end, because the first $5,000 of those losses will offset $5,000 of
capital gain that is already tax-free.
• Postpone income until 2023and accelerate deductions into 2022 if doing so will enable you to
claim larger deductions, credits, and other tax breaks for 2021 that are phased out over varying
levels of AGI. These include deductible IRA contributions, child tax credits, higher education tax
credits, and deductions for student loan interest. Postponing income also is desirable for
taxpayers who anticipate being in a lower tax bracket next year due to changed financial
circumstances. Note, however, that in some cases, it may actually pay to accelerate income into
2022. For example, that may be the case for a person who will have a more favorable filing status
this year than next (e.g., head of household versus individual filing status), or who expects to be
in a higher tax bracket next year. That’s especially a consideration for high-income taxpayers who
may be subject to higher rates next year under proposed legislation.
• If you believe a Roth IRA is better for you than a traditional IRA, consider converting traditionalIRA money invested in any beaten-down stocks (or mutual funds) into a Roth IRA in 2022 if
eligible to do so. Keep in mind that the conversion will increase your income for 2022, possibly
reducing tax breaks subject to phaseout at higher AGI levels. This may be desirable, however, for
those potentially subject to higher tax rates under pending legislation.
• It may be advantageous to try to arrange with your employer to defer, until early 2023, a bonus
that may be coming your way. This might cut as well as defer your tax. Again, considerations may
be different for the highest income individuals.
• Many taxpayers won’t want to itemize because of the high basic standard deduction amounts that
apply for 2022 ($27,700 for joint filers, $13,850 for singles and for marrieds filing separately,
$20,800 for heads of household), and because many itemized deductions have been reduced or
abolished, including the $10,000 limit on state and local taxes; miscellaneous itemized
deductions; and non-disaster related personal casualty losses. You can still itemize medical
expenses that exceed 7.5% of your AGI, state and local taxes up to $10,000, your charitable
contributions, plus mortgage interest deductions on a restricted amount of debt, but these
deductions won’t save taxes unless they total more than your standard deduction.
• Some taxpayers may be able to work around these deduction restrictions by applying a bunching
strategy to pull or push discretionary medical expenses and charitable contributions into the year
where they will do some tax good. For example, a taxpayer who will be able to itemize deductions
this year but not next will benefit by making two years’ worth of charitable contributions this year.
The COVID-related increase for 2022 in the income-based charitable deduction limit for cash
contributions from 60% to 100% of MAGI assists in this bunching strategy.
• Consider using a credit card to pay deductible expenses before the end of the year. Doing so will
increase your 2022 deductions even if you don’t pay your credit card bill until after the end of the
• If you expect to owe state and local income taxes when you file your return next year and you will
be itemizing in 2022, consider asking your employer to increase withholding of state and local
taxes (or make estimated tax payments of state and local taxes) before year-end to pull the
deduction of those taxes into 2022. But this strategy is not good to the extent it causes your 2022
state and local tax payments to exceed $10,000.
• Required minimum distributions RMDs from an IRA or 401(k) plan (or other employer-sponsored
retirement plan) have not been waived for 2022. If you were 72 or older in 2022 you must take an
RMD. Those who turn 72 this year have until April 1 of 2023 to take their first RMD but may want
to take it by the end of 2022 to avoid having to double up on RMDs next year.
• If you are age 70½ or older by the end of 2022, and especially if you are unable to itemize your
deductions, consider making 2022 charitable donations via qualified charitable distributions from
your traditional IRAs. These distributions are made directly to charities from your IRAs, and the
amount of the contribution is neither included in your gross income nor deductible on Schedule A,
Form 1040. However, you are still entitled to claim the entire standard deduction. (The qualified
charitable distribution amount is reduced by any deductible contributions to an IRA made for any
year in which you were age 70½ or older, unless it reduced a previous qualified charitable
distribution exclusion.)
• Take an eligible rollover distribution from a qualified retirement plan before the end of 2022 if you
are facing a penalty for underpayment of estimated tax and increasing your wage withholding
won’t sufficiently address the problem. Income tax will be withheld from the distribution and will be
applied toward the taxes owed for 2022. You can then timely roll over the gross amount of the
distribution, i.e., the net amount you received plus the amount of withheld tax, to a traditional IRA.
No part of the distribution will be includible in income for 2022, but the withheld tax will be applied
pro rata over the full 2022 tax year to reduce previous underpayments of estimated tax.
• Consider increasing the amount you set aside for next year in your employer’s FSA if you set
aside too little for this year and anticipate similar medical costs next year.
• If you become eligible in December of 2022 to make HSA contributions, you can make a full
year’s worth of deductible HSA contributions for 2022.
• Make gifts sheltered by the annual gift tax exclusion before the end of the year if doing so may
save gift and estate taxes. The exclusion applies to gifts of up to $16,000 made in 2022 to each
of an unlimited number of individuals. You can’t carry over unused exclusions to another year.
These transfers may save family income taxes where income-earning property is given to family
members in lower income tax brackets who are not subject to the kiddie tax.
• If you were in federally declared disaster area, and you suffered uninsured or unreimbursed
disaster-related losses, keep in mind you can choose to claim them either on the return for the
year the loss occurred (in this instance, the 2022 return normally filed next year), or on the return
for the prior year (2021), generating a quicker refund.
• If you were in a federally declared disaster area, you may want to settle an insurance or damage
claim in 2022 to maximize your casualty loss deduction this year.
These are just some of the year-end steps that can be taken to save taxes. Again, by contacting
us, we can tailor a particular plan that will work best for you.
Very truly yours,
Sample Year-End Planning Client Letter: Businesses
Dear Business Client:
With year-end approaching, it is time to start thinking about moves that may help lower your
business’s taxes for this year and next. This year’s planning is more challenging than usual due
to recent changes made by the Inflation Reduction Act of 2022 and the potential change in
congressional balance of power resulting from the midterm elections.
Whether or not tax increases become effective next year, the standard year-end approach of
deferring income and accelerating deductions to minimize taxes will continue to produce the
best results for most small businesses, as will the bunching of deductible expenses into this
year or next to maximize their tax value.
If proposed tax increases do pass, however, the highest income businesses and owners may
find that the opposite strategies produce better results: Pulling income into 2022 to be taxed at
currently lower rates, and deferring deductible expenses until 2023, when they can be taken to
offset what would be higher-taxed income. This will require careful evaluation of all relevant
We have compiled a list of actions based on current tax rules that may help you save tax dollars
if you act before year-end. Not all of them will apply to you or your business, but you may
benefit from many of them. We can narrow down specific actions when we meet to tailor a
particular plan for your business, In the meantime, please review the following list and contact
us at your earliest convenience so that we can advise you on which tax-saving moves might be
• Taxpayers other than corporations may be entitled to a deduction of up to 20% of their qualified
business income. For 2022, if taxable income exceeds $340,100 for a married couple filing jointly,
(about half that for others), the deduction may be limited based on whether the taxpayer is
engaged in a service-type trade or business (such as law, accounting, health, or consulting), the
amount of W-2 wages paid by the business, and/or the unadjusted basis of qualified property
(such as machinery and equipment) held by the business. The limitations are phased in; for
example, the phase-in applies to joint filers with taxable income up to $100,000 above the
threshold, and to other filers with taxable income up to $50,000 above their threshold.
• Taxpayers may be able to salvage some or all of this deduction, by deferring income or
accelerating deductions to keep income under the dollar thresholds (or be subject to a smaller
deduction phaseout) for 2022. Depending on their business model, taxpayers also may be able
increase the deduction by increasing W-2 wages before year-end. The rules are quite complex,
so don’t make a move in this area without consulting us.
• More small businesses are able to use the cash (as opposed to accrual) method of accounting
than were allowed to do so in earlier years. To qualify as a small business a taxpayer must,
among other things, satisfy a gross receipts test, which is satisfied for 2022 if, during a three-year
testing period, average annual gross receipts don’t exceed $27 million (next year this dollar
amount is estimated to increase to $29 million). Not that many years ago it was $1 million. Cash
method taxpayers may find it a lot easier to shift income, for example by holding off billings till
next year or by accelerating expenses, for example, paying bills early or by making certain
• Businesses should consider making expenditures that qualify for the liberalized business property
expensing option. For tax years beginning in 2022, the expensing limit is $1,080,000, and the
investment ceiling limit is $2,700,000. Expensing is generally available for most depreciable
property (other than buildings) and off-the-shelf computer software. It is also available for interior
improvements to a building (but not for its enlargement), elevators or escalators, or the internal
structural framework), for roofs, and for HVAC, fire protection, alarm, and security systems.
• The generous dollar ceilings mean that many small and medium sized businesses that make
timely purchases will be able to currently deduct most if not all their outlays for machinery and
equipment. What’s more, the expensing deduction is not prorated for the time that the asset is in
service during the year. So expensing eligible items acquired and placed in service in the last
days of 2022, rather than at the beginning of 2023, can result in a full expensing deduction for
• Businesses also can claim a 100% bonus first year depreciation deduction for machinery and
equipment bought used (with some exceptions) or new if purchased and placed in service this
year, and for qualified improvement property, described above as related to the expensing
deduction. The 100% write-off is permitted without any proration based on the length of time that
an asset is in service during the tax year. As a result, the 100% bonus first-year write-off is
available even if qualifying assets are in service for only a few days in 2022.
• Businesses may be able to take advantage of the de minimis safe harbor election (also known as
the book-tax conformity election) to expense the costs of lower-cost assets and materials and
supplies, assuming the costs aren’t required to be capitalized under the UNICAP rules. To qualify
for the election, the cost of a unit of property can’t exceed $5,000 if the taxpayer has an
applicable financial statement (AFS, e.g., a certified audited financial statement along with an
independent CPA’s report). If there’s no AFS, the cost of a unit of property can’t exceed $2,500.
Where the UNICAP rules aren’t an issue, and where potentially increasing tax rates for 2023
aren’t a concern, consider purchasing qualifying items before the end of 2022.
• A corporation (other than a large corporation) that anticipates a small net operating loss (NOL) for
2022 (and substantial net income in 2023) may find it worthwhile to accelerate just enough of its
2023 income (or to defer just enough of its 2022 deductions) to create a small amount of net
income for 2022. This allows the corporation to base its 2023 estimated tax installments on the
relatively small amount of income shown on its 2022 return, rather than having to pay estimated
taxes based on 100% of its much larger 2023 taxable income.
• Year-end bonuses can be timed for maximum tax effect by both cash-and accrual-basis employers.
Cash-basis employers deduct bonuses in the year paid, so they can time the payment for maximum
tax effect. Accrual-basis employers deduct bonuses in the accrual year, when all events related to
them are established with reasonable certainty. However, the bonus must be paid within 2½ months
after the end of the employer’s tax year for the deduction to be allowed in the earlier accrual year.
Accrual employers looking to defer deductions to a higher-taxed future year should consider
changing their bonus plans before year-end to set the payment date later than the 2.5-month
window or change the bonus plan’s terms to make the bonus amount not determinable at year end.
• To reduce 2022 taxable income, consider deferring a debt-cancellation event until 2023.
• Sometimes the disposition of a passive activity can be timed to make best use of its freed-up
suspended losses. Where reduction of 2022 income is desired, consider disposing of a passive
activity before year-end to take the suspended losses against 2022 income. If possible 2023 top
rate increases are a concern, holding off on disposing of the activity until 2023 might save more in
future taxes.
These are just some of the year-end steps that can be taken to save taxes. Again, by contacting
us, we can tailor a particular plan that will work best for you.
Very truly yours,


October 20, 2022

The IRS announced inflation adjustments for tax year 2023. The items adjusted for annual inflation include tax rate schedules, the standard deduction, and more than 60 other provisions.

New for 2023.

The Inflation Reduction Act (PL 117-169) extended certain energy-related tax breaks and indexed for inflation the energy-efficient commercial buildings deduction beginning with tax year 2023.

For tax years starting in 2023, the applicable dollar value used to determine the increased deduction amount for certain property under Code Sec. 179D(b)(3) is $2.68 increased (up to $5.36) by $0.11 for each percentage point by which the total annual energy and power costs for the building are certified to be reduced by more than 25%.

Highlights of changes in

Rev. Proc. 2022-38. The tax items for tax year 2023 of greatest interest to most taxpayers include the following dollar amounts:

The standard deduction. The standard deduction amounts for 2023 are:

  • $27,700 for married couples filing jointly (up from $1,800 in 2022);
  • $13,850 (up $900) for single taxpayers and married individuals filing separately.
  • $20,800 (up $1,400) for heads of households.

Marginal rates. For tax year 2023, the top tax rate remains 37% for individual single taxpayers with incomes greater than $578,125 ($693,750 for married couples filing jointly). The other rates are:

  • 35% for incomes over $231,250 ($462,500 for married couples filing jointly);
  • 32% for incomes over $182,100 ($364,200 for married couples filing jointly);
  • 24% for incomes over $95,375 ($190,750 for married couples filing jointly);
  • 22% for incomes over $44,725 ($89,450 for married couples filing jointly);
  • 12% for incomes over $11,000 ($22,000 for married couples filing jointly).

The lowest rate is 10% for incomes of single individuals with incomes of $11,000 or less ($22,000 for married couples filing jointly).

Alternative Minimum Tax. The AMT exemption amount for tax year 2023 is $81,300 (up from $75,900) and begins to phase out at $578,150 ($539,900). The AMT exemption for joint filers is $126,500 and their exemption begins to phase out at $1,156,300 (up from $1,079,800).

Earned income tax credit. The tax year 2023 maximum EITC amount is $7,430 for qualifying taxpayers who have three or more qualifying children, up from $6,935 for tax year 2022. Rev Proc 2022-38 contains a table providing maximum EITC amount for other categories, income thresholds, and phase-outs.

Qualified transportation fringe. For tax year 2023, the monthly limitation for the qualified transportation fringe benefit and the monthly limitation for qualified parking increases to $300, up $20 from the limit for 2022.

Health flexible savings accounts. For the tax years beginning in 2023, the dollar limitation for employee salary reductions for contributions to health FSAs increases to $3,050. For cafeteria plans that permit the carryover of unused amounts, the maximum carryover amount is $610, an increase of $40 from 2022.

Medical savings accounts. For tax year 2023, an HSA participant with self-only coverage must have a high-deductible health plan with an annual deductible of at least $2,650, but not more than $3,950. The maximum out-of-pocket expense amount is $5,300 (up from $4,950 in 2022). For family coverage, the HDHP must have an annual deductible of not less than $5,300 and no more than $7,900 (up $500 from 2022). The out-of-pocket expense limit is $9,650 (a $600 increase over 2022)

Foreign earned income exclusion. For tax year 2023, the foreign earned income exclusion is $120,000 up from $112,000 in 2022.

Unified credit against estate tax. Estates of decedents who die during 2023 have a basic exclusion amount of $12,920,000 (up from $12,060,000 in 2022).

Annual gift tax exclusion. The annual exclusion for gifts increases to $17,000 for calendar year 2023, up from $16,000 for 2022.

Adoption credit and exclusion for adoption assistance. The maximum credit allowed for adoptions in 2023 is $15,950, (up from $14,890 for 2022). Employees who receive adoption assistance can exclude from income up to $15,950 of such assistance.

Items not indexed for inflation. By statute, certain items that previously were indexed for inflation are currently not adjusted. Those items include:

The personal exemption for tax year 2023 remains at 0, as it was for 2022. The personal exemption was eliminated by the Tax Cuts and Jobs Act.

For 2023—as in 2022, 2021, 2020, 2019, and 2018—there is no limitation on itemized deductions, as that limitation was eliminated by the Tax Cuts and Jobs Act.

The modified adjusted gross income amount used by joint filers to determine the reduction in the Lifetime Learning Credit provided in § 25A(d)(2) is not adjusted for tax years beginning after December 31, 2020. The Lifetime Learning Credit is phased out for taxpayers with modified adjusted gross income in excess of $80,000 ($160,000 for joint returns).



August 5, 2022

By Paul Bonner

July 28, 2022

A path toward a long-sought congressional vote on a federal budget reconciliation bill appeared to open Wednesday as Sen. Joe Manchin, D-W.Va., endorsed fast-track legislation that would contain a variety of tax provisions.

Manchin’s buy-in, which surprised observers and even some members of his own party, came with his agreement on the package’s contents with Senate Majority Leader Chuck Schumer, D-N.Y. Provisions intended to reduce the federal deficit, along with measures aimed at lowering energy and health care costs, were prominent in Manchin’s statement issued Wednesday.

The bill, titled the Inflation Reduction Act of 2022, also includes some of the proposed measures to combat climate change that were originally in President Joe Biden’s signature Build Back Better legislation, which had been mired in debate for much of Biden’s administration. Some of these provisions feature new or expanded tax credits.

The Inflation Reduction Act’s centerpiece tax provision, however, is a 15% corporate minimum tax, which also has been controversial but that Manchin endorsed in his statement.

“It is wrong that some of America’s largest companies pay nothing in taxes while freely enjoying the benefits of our nation’s military security, infrastructure, and rule of law,” Manchin said.

The provision would apply the tax generally on the excess of 15% of C corporations’ adjusted financial statement income over any corporate alternative minimum tax foreign tax credit for the tax year, for corporations with average annual adjusted financial statement income for the three consecutive tax years ending with the tax year exceeding $1 billion. A $100 million threshold would apply to certain “foreign-parented” corporations. The provision, which would apply to an estimated 200 companies, would be effective for tax years beginning after 2022.

Individuals and organizations including the AICPA have criticized a corporate minimum tax based on financial statement, or “book,” income. The AICPA wrote congressional tax-writing committee leaders in October 2021 and again in June 2022, counseling against including such a tax in a reconciliation bill.

Among its concerns with the provision, the AICPA stated that it introduces new complexities in calculating taxes for affected corporations. More fundamentally, by basing it on book income, the tax “takes the definition of taxable income out of Congress’s hands and puts it into the hands of industry regulators and others,” both letters stated.

Under provisions intended to increase clean and reliable energy supplies, the bill contains production tax credits intended to spur $30 billion in investments for domestic manufacturing of solar panels, wind turbines, batteries, and “critical minerals” processing. An investment tax credit would aid facilities manufacturing electric vehicles, wind turbines, and solar panels, worth another $10 billion.

Provisions to reduce carbon emissions would include tax credits for clean sources of electricity, energy storage, clean fuels, and efficient commercial vehicles. Other tax credits would encourage development of biofuels, help reduce industrial manufacturing emissions, and support consumer expenditures on energy-efficient residential property and vehicles.

In all, the energy and environmental provisions are estimated to cost $369 billion and reduce carbon emissions by 40% by 2030, according to a summary by Schumer’s office. In an accompanying statement, Schumer thanked Manchin for helping reach an agreement “that can earn the support of all 50 Senate Democrats.”

Biden said in a statement Wednesday that he had spoken with Manchin and Schumer, thanked them, and offered his support for the bill. He stated that, besides the energy provisions, the legislation would reduce the federal deficit, thereby combating inflation, and allow Medicare to negotiate prescription drug prices, reducing health care costs.

“And we will pay for all of this by requiring big corporations to pay their fair share of taxes, with no tax increases at all for families making under $400,000 a year,” Biden said.

Despite an air of assurance in the senators’ and president’s statements, however, the deal still faces hurdles that include vetting by the Senate parliamentarian for budgetary rule compliance and a vote by the chamber, which Schumer said he expects will occur next week.

The apparent freeing of the logjam on reconciliation comes a day after the Senate passed another bill that had been long in reaching consensus, one that would support domestic semiconductor manufacturing and research, in part with a new investment tax credit.


May 20, 2022
  • Besides providing a tax-favorable option for taxpayers to pay out-of-pocket medical expenses, HSAs can be used as a flexible tax-favored investment vehicle.
  • Annual contributions to an HSA are limited in 2022 to $3,650 for an individual self-only plan or $7,300 for a family plan ($3,600 and $7,200, respectively, in 2021). An additional $1,000 is allowed for taxpayers who reach age 55 by the end of the tax year. HSA contributions within these limits are tax-deductible.
  • Withdrawals from HSAs are tax-free to the extent that they are used to pay qualified medical expenses, including expenses for over-the-counter drugs and menstrual care products. There is no time limit on a taxpayer requesting reimbursement from an HSA for a medical expense he or she paid with funds outside the HSA.
  • Because there is no reimbursement time limit, a taxpayer can defer reimbursement from the HSA for medical expenses paid until the time he or she chooses. By deferring reimbursement of medical expenses, contributions to an HSA can grow tax-free, similar to contributions to an IRA or Roth IRA.
  • Withdrawals of the amounts a taxpayer contributes to the HSA plus investment earnings, up to the amount of accumulated reimbursable medical expenses, can be taken tax-free when the taxpayer chooses to request reimbursement.

This article shows how clients can benefit from viewing a health savings account (HSA) as a flexible tax-favored investment strategy. HSAs allow taxpayers of any income level to deduct contributions immediately and withdraw the contributions, with accumulated investment earnings, free of tax at any age. That is, the “health” moniker can be a misnomer by disguising a key benefit of an HSA: An HSA can be a flexible tax-favored investment vehicle.

Compared with more aptly named individual retirement accounts (IRAs), an HSA savings strategy (1) allows tax-deductible contributions like a traditional IRA but without its limitations on working alongside a Sec. 401(k); (2) allows tax-free withdrawals like a Roth IRA and without its income-based contribution limits; and (3) avoids waiting until retirement age for penalty-free withdrawals of earnings, as required by both traditional and Roth IRAs. This short article explains that U.S. tax law currently permits this tax-favored investment strategy by effectively combining the tax benefits of an HSA with an investment strategy.1

Sec. 223 allows a taxpayer covered by a qualified family high-deductible health plan (HDHP) to make deductible contributions to an HSA trust account of up to $7,300 in 2022 or $7,200 in 2021 (for taxpayers with a qualified self-only HDHP, $3,650 in 2022 and $3,600 in 2021). An additional $1,000 deduction is allowed for taxpayers who are at least 55 years old at any time during the tax year. Employer contributions made to an HSA are excludable from the employee’s gross income (Secs. 106(d) and 125). The employer contributions to the HSA also reduce the annual limits on the employee’s deductible contributions. An HSA remains with a taxpayer after he or she leaves an employer or the workforce entirely, which adds portability to the benefits of an HSA.

Withdrawals from an HSA to cover the costs of qualified medical expenses as defined in Sec. 223(d)(2) are tax-free, including withdrawals of investment earnings on the HSA funds. Employees can direct the HSA administrator to pay for qualified medical expenses directly from the account. Indeed, some plans provide HSA participants with debit cards to pay these expenses directly, which can help the taxpayer meet the substantiation requirements. Regardless of how medical costs are withdrawn, the taxpayer is responsible for documenting that the funds are used exclusively to pay for qualified medical expenses, that the expense has not previously been reimbursed or paid for by another source, and that the medical expense is not also included among itemized deductions.

An alternate approach — the strategy recommended here — is for the taxpayer to pay the medical bills personally and request reimbursement of these costs from the HSA only when he or she needs the funds. Of course, a taxpayer should carefully document each medical expenditure and carefully preserve this documentation. However, there is no time requirement for requesting reimbursement from the HSA. Therefore, a valid tax strategy is to pay medical costs from non-HSA funds, retain the reimbursement documentation, and wait until the funds are needed to obtain reimbursement for the costs. Note, however, this strategy is only useful to the extent that the taxpayer can afford to pay the medical expenses from sources outside the HSA. This approach is valid because no time limit prescribes when a qualified medical expense claim must be filed.

The ability to use an HSA as a tax-favored investment vehicle depends on two things. First, when a medical bill falls due, the taxpayer must be capable of paying it with funds outside the HSA. The investment benefit decreases as the taxpayer draws on the HSA funds. Second, taking tax-free withdrawals depends in part on the taxpayer’s incurring medical costs that can be reimbursed from the HSA upon submission of receipts. Since some taxpayers and their families are relatively healthy, their health decreases the flexibility of the HSA as a tax-favored investment vehicle from which funds can be drawn upon quickly and without penalty. However, even healthy taxpayers face regular health and dental expenses, which include unprescribed over-the-counter medicine and menstrual care products, that qualify for reimbursement. To the extent that a taxpayer pays these costs out of pocket and can substantiate they were paid, these paid but unreimbursed costs allow the taxpayer to later draw on his or her tax-favored investment as needed. One way to view paying qualified medical expenses with non-HSA funds is that these payments become highly flexible, heavily tax-favored investments. Of course, if non-HSA savings or after-tax investments are not available to pay medical costs, HSA funds can be used. But using HSA funds to pay qualified medical expenses should be a last resort, not the default strategy.

Examples of applying the strategy

Example 1: M (age 25) and J (age 24) married in 2021. M works for a large public accounting firm, and J freelances as a graphic design artist. Starting in 2021, each year, M’s employer pays the cost of family HDHP coverage and contributes $2,000 to M’s HSA. In addition, M and J annually contribute $1,000 to the HSA and claim a deduction for this amount on their joint tax return; this $1,000 pretax contribution is considerably smaller than would be required for traditional full-coverage health insurance. The net annual cost is $700 after considering their 30% marginal tax rate. M and J are in good physical condition, but annual vision, dental, and menstrual care; wellness checks; and over-the-counter medicine costs total $2,500 per year, which M and J carefully document and pay out of pocket without requesting reimbursement from the HSA. The HSA funds are invested and earn 8% annually.

The couple buy a house in 2027 after having a baby in 2025.The couple planned and paid for the $6,000 cost of having the baby out of pocket, including prenatal care and two hospital nights.2 By 2027, the balance in the HSA has grown to $27,839, which includes $6,839 of tax-free income. In 2027, the couple submit reimbursable receipts that total $23,500, the proceeds of which finance a portion of the down payment on the house. 3

Example 2: B (age 51) and G (age 47) are empty nesters at the beginning of their high-income years and begin considering the heavier medical costs that are likely to come with getting older. B is a successful self-employed consultant who earns approximately $300,000 annually, an amount that trends upward a bit each year. Starting in 2021, they switch to an HDHP and begin contributing (and deducting) the maximum per year, which is $7,200 and is assumed to increase $100 per year; they add $1,000 per year to their contributions when B turns 55 in 2025. Annual reimbursable medical costs from 2021 to 2035 begin at $3,500 and increase by $200 per year; these costs are paid out of pocket, but the receipts are carefully maintained. The HSA funds are invested and earn 8% annually.

Just before B retires, shortly after reaching age 65, they buy a second home in an active retirement community. Part of the down payment for the home is the $73,500 supported by medical receipts that they withdraw tax-free from their HSA. After the withdrawal, $162,924 remains in the HSA earning 8% annually. These funds can be withdrawn tax-free to pay premiums for Medicare Part A, B, C, or D coverage and long-term health care costs.4

Quantified benefits of the strategy

Let us assume that in December 2021 a taxpayer receives a $1,000 medical bill for a recent outpatient procedure. She maintains an HDHP and possesses both a $5,000 balance in her HSA and sufficient after-tax investment funds with which to pay the bill. She expects the same risk and return from the HSA investment that she would obtain from the non-HSA investment. Let us compare the 10-year after-tax effects of two ways of using the HSA: (1) paying the $1,000 medical bill personally, requesting reimbursement of the $1,000 from her HSA, and investing the $1,000 reimbursement check outside the HSA, and (2) paying the $1,000 medical bill using existing after-tax investment funds that do not require gain recognition to access, and leaving $1,000 invested within the HSA with annual earnings realizations.

Table 1 (below) shows the results of this comparison across three possible pretax rates of return (2%, 6%, and 12%). In the table, the investments (either inside or outside the HSA) are assumed to produce interest or short-term capital gain income that is reinvested annually and, if invested outside the HSA, are subject to two possible marginal tax rates (20% and 40%).

Table 1, Panel A, shows that, facing a 20% marginal tax rate, after 10 years, the investment outside the HSA increases in value by 17.2%, 59.8%, and 150.1% with respective annual pretax returns of 2%, 6%, and 12%. However, if the funds are invested within the HSA, the 20% annual tax does not apply. Thus, the annual pretax returns of 2%, 6%, and 12% are the after-tax returns. At 2%, 6%, and 12%, the 10-year cumulative after-tax returns are 21.9%, 79.1%, and 210.6%, respectively. If the only difference between investing outside the HSA and inside the HSA is the 20% annual tax on investment earnings, a $1,000 investment within the HSA will produce cumulative 10-year returns that are 4.7, 19.3, and 60.5 percentage points greater than an investment outside the HSA, given pretax returns of 2%, 6%, and 12%, respectively. In Panel B, the marginal tax rate is 40%, and the additional after-tax benefit of investing within the HSA nearly doubles to 9.2, 36.7, and 110.2 percentage points across the respective 2%, 6%, and 12% pretax returns.

Table 2 (below) shows comparable figures to Table 1, except that the underlying investment produces taxable gain only at the end of the 10-year period. The capital gains tax rate for the investment outside the HSA is assumed to be 15% in Panel A and 30% in Panel B. For example, in the first column of Panel A, the $1,000 investment that earns 2% compounded annually produces a pretax investment value of $1,218.99 (i.e., $1,000 × (1 + 0.02)10). The increase in investment value, $218.99, is subject to 15% capital gains tax ($32.85), which leaves an after-tax investment of $1,186.15 and an after-tax 10-year cumulative return of 18.6%.

If the $1,000 had remained invested inside the HSA at the same 2% compounded annually, it would have produced an after-tax investment valued at $1,218.99 and a 10-year after-tax return of 21.9%, 3.3 percentage points higher than if invested outside the HSA. Assuming pretax rates of return of 6% and 12%, respectively, an investment inside the HSA produces cumulative 10-year investment returns that are 11.9 and 31.6 percentage points higher than an investment outside the HSA. In Panel B, we see that increasing the 15% long-term capital gains tax to 30% doubles the additional 10-year after-tax return from delaying HSA reimbursement to 6.6, 23.7, and 63.2 percentage points across the 2%, 6%, and 12% respective annual pretax rates of return.

Tables 1 and 2 show that funds allowed to remain in an HSA produce greater after-tax returns than funds withdrawn from an HSA and then invested. The differential is widest when the underlying investment produces higher pretax rates of returns and when the taxpayer’s marginal tax rate is greater. Also note that keeping the funds inside the HSA has greater relative tax benefits when the underlying investment produces annual earnings realizations (Table 1) than when it produces end-of-the-investment-period capital gains (Table 2).

Comparing the HSA with a traditional IRA and a Roth IRA

A variety of investments provide tax benefits, including (1) purchasing a security that produces tax-exempt municipal bond interest; (2) acquiring real estate and property that produces tax-sheltering depreciation; and (3) investing in nondividend growth securities that defer gain realizations, among many other possibilities. But for many taxpayers, IRAs are comparable with the HSA. If a taxpayer is familiar with an HSA, she also likely is somewhat familiar with a traditional IRA or a Roth IRA. So, next we compare the features of these tax-favored vehicles, although it is important to note that it is quite possible, and likely advisable, for a taxpayer to utilize both an HSA and an IRA simultaneously.

Some pertinent HSA details: An HSA is available to any taxpayer who maintains an HDHP, who has no other health insurance (including Medicare), and who cannot be claimed as a dependent on someone else’s tax return. For this purpose, an HDHP must meet the requirements of Sec. 223(c)(2), including 2022 maximum annual out-of-pocket expenditures of $7,050 for a self-only plan or $14,100 for a family plan ($7,000 and $14,000, respectively, in 2021). In accord with its high-deductible name, an HDHP must also have 2022 (and 2021) minimum deductible amounts of $1,400 for a self-only plan and $2,800 for a family plan.

Contributions to an HSA are deductible if contributed by a taxpayer or excludable from gross income if contributed by a taxpayer’s employer. However, once a taxpayer begins Medicare coverage, no contributions to an HSA are allowed. For taxpayers who will begin Medicare in the month they turn 65, contributions to the HSA must cease and the taxpayer can only deduct a month-based pro rata portion of the annual HSA contribution limit for that year. Taxpayers should be aware that they can become accidentally enrolled in Medicare when they turn 65 because the Social Security Administration automatically enrolls them or because they work for a smaller employer who automatically shifts medical insurance to Medicare upon reaching their 65th birthday. However, a taxpayer can reject these automatic enrollments, allowing the taxpayer to continue making tax-deductible contributions to an HSA as long as he or she maintains coverage under a qualified HDHP.5

Some employers allow employees to receive some (or all) of their health insurance benefit in the form of contributions to an HSA, which are deductible to the employer and excludable to the employee. Taxpayers without this form of compensation can make their own contributions. Regardless of source, the annual contributions to an HSA are limited in 2022 to $3,650 for an individual self-only plan or $7,300 for a family plan ($3,600 and $7,200, respectively, in 2021), and an additional $1,000 for taxpayers who are age 55 by the end of the tax year.

Withdrawals from an HSA are tax-free if they are used for qualified medical expenses, as defined in Sec. 223(d)(2), that, for expenditures incurred after Dec. 31, 2019, include menstrual care products and over-the-counter medicine.6 A taxpayer must be able to substantiate that the withdrawals were used for qualified medical expenses. Withdrawals from an HSA greater than amounts used for qualified medical expense are taxable, and an additional 20% penalty is applied to withdrawals before the taxpayer reaches age 65 that are not used for qualified medical expenses. The 20% penalty is waived upon the death or disability of the beneficiary. The HSA has no minimum required distributions.

Comparable aspects of traditional IRAs and Roth IRAs: Neither the traditional nor Roth IRA requires health insurance coverage of any kind, and certainly not HDHP coverage. On the other hand, both IRA types require service-related income (“compensation”), while an HSA can be used to reduce any type of taxable income. Contributions to either the traditional IRA or Roth IRA (or both) are limited to the lesser of $6,000 (in both 2021 and 2022) or taxable service-related compensation. An additional $1,000 is allowed for contributions to the IRA account(s) by taxpayers who are age 50 by the end of the tax year, five years younger than the 55 required for the $1,000 addition for an HSA.

Like contributions to an HSA, contributions to a traditional IRA generally are deductible by taxpayers. It is also possible to structure excludable employer contributions on behalf of employees under separate rules for a Sec. 408(k) SEP IRA or a Sec. 408(p) SIMPLE IRA. However, taxpayers with an employer-provided retirement plan (e.g., Sec. 401(k)) can only deduct their IRA contribution if they have modest amounts of income. Specifically, for these taxpayers, the traditional IRA contribution deduction completely phases out in 2022 when modified adjusted gross income (MAGI) reaches $78,000 for single or head-of-household taxpayers, $129,000 for married-filing-jointly taxpayers, or $10,000 for married-filing-separately taxpayers.

Contributions to a Roth IRA are not deductible, in contrast with contributions to both an HSA and a traditional IRA. Also, for Roth IRAs, contributions are generally disallowed for higher-income taxpayers. In 2022, the amount a taxpayer can contribute to a Roth IRA is completely phased out when MAGI reaches $214,000 for a married-filing-jointly filer, $144,000 for a single or head-of-household filer, or $10,000 for a married-filing-separately filer.7

Withdrawals from a traditional IRA are taxable. Furthermore, a 10% additional tax on early distributions applies to amounts withdrawn before the taxpayer reaches age 59½. Withdrawals from a Roth IRA are not taxable and not subject to the 10% additional tax on early distributions if they are made after the taxpayer reaches age 59½ and the taxpayer has had a Roth IRA for at least five years. Withdrawals of contributions to a Roth IRA at any age are not taxable or subject to the 10% additional tax on early distributions. However, withdrawals of earnings from a Roth IRA generally are taxable and may be subject to the 10% additional tax on early distributions unless one of several exceptions applies.

Table 3 (below) compares basic features of traditional IRAs, Roth IRAs, and HSAs as investment vehicles.

Flexibility and tax benefits

Taxpayers with HSAs receive tax and flexibility benefits when they pay medical costs using non-HSA funds. The tax benefit arises because HSA withdrawals are tax-exempt income to the extent that they are supported by receipts for qualified medical expenses. The flexibility arises because the taxpayer can choose when to submit the receipts, accumulating them over time until the taxpayer chooses to make a tax-free withdrawal. Compared with either a traditional IRA or a Roth IRA, an HSA has the advantage that it accumulates tax-exempt income that can be withdrawn at any age, subject only to the requirement that the taxpayer can submit receipts for qualified medical expenses.

1This article only summarizes, compares, and analyzes some of the key features of the HSA, traditional IRA, and Roth IRA tax-favored health and retirement savings vehicles. Other sources should be consulted for complete details, which could include related articles in The Tax Adviser and Tax Insider: Zonneveld, “Health Savings Accounts Can Save Taxpayers Money,” Tax Insider (Oct. 10, 2019); Mindy, “How to Make Sure an HSA Avoids ERISA,” Tax Insider (Sept. 28, 2017); Doerrer and Trotta, “Developing a Solid Approach to Advising Clients on Roth IRAs,” 51 The Tax Adviser 604 (September 2020); and Lott “Roth IRA Planning,” 47 The Tax Adviser 202 (March 2016).

2See Cautero, One Mom Shares How Much It Cost to Have a Baby With an HDHP,” Northwestern Mutual website (Oct. 21, 2020).

3Details of the M and J computations can be viewed here.

4Details of the B and G computations can be viewed here.

5Practitioners should discuss with the clients the possible downsides of not enrolling in Medicare Part A, which are beyond the scope of this article.

6Coronavirus Aid, Relief, and Economic Security (CARES) Act, P.L. 116-136, Sec. 3702, Sec. 223(d)(2).

7It is possible to circumvent Roth income limitations using a so-called backdoor Roth conversion strategy where the taxpayer contributes to a traditional IRA and, by the end of the tax year, the traditional IRA is rolled into a Roth IRA so that no balance remains in any traditional SEP or SIMPLE IRA account at year end. Details of this strategy are beyond the scope of this article.


Jeffrey Gramlich, Ph.D., is a professor of accounting at Washington State University in Pullman, Wash. He is also the director of the Hoops Institute of Taxation Research and Policy. For more information about this article, contact



January 13, 2022

Importance of purchase price allocation in real estate transactions

By Jennifer M. Ray, CPA, Frazier & Deeter LLC, Tampa, Fla.

December 1, 2021

The bright pink house for sale was an eye-catcher. Built in the 1960s, this not-really-updated two-bedroom, one-bath house was purchased in 2001 for $100,000. In 2019, the asking price was $300,000, but it did not sell. Fast forward to 2021, and during a pandemic, the same house sold for $400,000. Could this little gem of construction really have increased so much in value in a couple of years? Or possibly was it the fact that it was on an extra-wide waterfront lot?

Suppose that this pink house was an income-producing property for the seller. When the property was originally acquired, the purchase price would have been allocated between the land and the building so that the building could be depreciated. Typically, in this situation the owner wants to be able to allocate as much purchase price as possible to the building so that the cost can be recouped (albeit ever so slowly) by depreciation. Often, this allocation is an afterthought and is done using the 20/80 rule of thumb (20% of the purchase price to the land and 80% of the purchase price to the building).

To calculate the gain on a sale, the same principle applies — the sales price needs to be allocated between the land and the building. Again, this allocation is typically done as an afterthought and, quite frankly, at the time the return is being prepared, potentially more than 1½ years after the sale. Here is where tax practitioners have a responsibility to advise their clients as to the significance of the land/building value allocation and what it means to the client’s tax bill.

Depreciable real estate, whether residential or commercial, that is used in a trade or business is Sec. 1231 property. The sale of Sec. 1231 property results in taxation at capital gain rates if there is a gain and ordinary income rates if there is a loss. Property owners are typically aware of the favorable tax rates they are allowed upon sale, but just like the rules of grammar, there is usually an exception to the rule. For depreciable real estate, the exception is in Sec. 1250, which provides that to the extent of depreciation taken (or allowed), the gain on the real estate sale is taxed at ordinary rates up to 25%. Depreciable real property is taxed at 25% up to the amount of depreciation taken and then taxed at capital gain rates. On the other hand, land is also Sec. 1231 property, but because it is not eligible for depreciation, it is not Sec. 1250 property.

To return to the little pink house on the extra-wide waterfront lot, which this analysis supposes is rental property: This more-than-50-year-old house was sold for four times its purchase price 20 years after acquisition. The tax practitioner likely did an easy 20/80 allocation to establish the house value for depreciation purposes. It would be easy enough to do the same for the sale and call it a day. The firm has other returns to get done, and this is just one more it can check off its list.

Under this approach, gain would be calculated on the sale first by allocating $320,000 of sale proceeds to the house and $80,000 to the land. Remember that the initial purchase price of $100,000 was allocated $80,000 to the house and $20,000 to the land. Assuming no closing costs and $60,000 of accumulated depreciation (for ease of calculation), the Sec. 1250 gain is $60,000 and the Sec. 1231 gain is $300,000 ($240,000 for the house and $60,000 for the land). Using the maximum capital gain rate, the tax on the sale is $75,000 (Sec. 1250 gain of $15,000 ($60,000 × 25%) and Sec. 1231 gain of $60,000 ($300,000 × 20%)). But is this really in the client’s best interest? Remember, it is the tax practitioner’s responsibility to advocate for the client.

In reality, the purchaser of this property has little to no interest in the ’60s-style pink house. The real value of this property lies in the large waterfront lot (sunsets included). With this in mind, a tax practitioner can rethink the purchase price allocation of the $400,000 sale proceeds and potentially allocate $20,000 to the house and $380,000 to the land. Using this method, the gain on the house is $0, and the entire $360,000 gain ($380,000 — $20,000) is on the land at capital gain rates. The resulting tax is $72,000 ($360,000 × 20%), a $3,000 cash-in-pocket savings over the 20/80 allocation method. Not only has the tax practitioner saved the client $3,000 (possibly more than the cost of the invoice), but he or she is also a tax hero, bound to receive numerous referrals from a happy client.

Note that it is important to properly document the allocation of value between the building and the land. Ideally, an appraisal would separately state the land and building values. Often, the tax practitioner finds out about a sale after the fact, and such an appraisal is not practical. In this case, the practitioner may look to the county tax assessor’s allocation, the advice of a knowledgeable real estate professional, or even an estimated replacement cost for the building (see Meiers, T.C. Memo. 1982-51).

In a year when real estate prices are soaring in many areas of the country, these easily overlooked allocations can have a significant tax impact. The above example is a relatively small dollar amount for real estate, and the tax savings could easily be multiplied for larger, more valuable properties. By using the proper land/building value allocation, tax practitioners can continue to do their best for clients.


Todd Miller, CPA, is a tax partner at Maxwell Locke & Ritter in Austin, Texas.

For additional information about these items, contact Todd Miller at 352-727-4155 or

Contributors are members of or associated with CPAmerica Inc.


January 11, 2022

Minimizing a hobby loss issue by electing S status

Editor: John Baer, CPA

December 1, 2021

If an activity is not engaged in for profit, the “hobby loss” rules of Sec. 183(a) provide that deductions in excess of gross income are not allowable. This statute specifically applies to activities engaged in by both individuals and S corporations. Accordingly, the mere form of conducting business is not the determinative factor in the hobby loss issue.

Due to the suspension of miscellaneous itemized deductions in the years 2018 through 2025, deductions for hobby expenses under Sec. 183 are not allowed in those years (Sec. 67(g), as added by the law known as the Tax Cuts and Jobs Act (TCJA), P.L. 115-97). The inability of a taxpayer to deduct even a portion of the hobby expenses while recognizing all the hobby income in adjusted gross income makes establishing a profit motive for a hobby activity even more desirable.

The question of whether an activity is engaged in for profit involves a series of subjective interpretations regarding the business. The regulations list nine relevant factors to consider when determining whether an activity is engaged in for profit (Regs. Sec. 1.183-2(b)):

  • The manner in which the taxpayer carries on the activity, including such formalities as maintaining books and records;
  • The expertise of the taxpayer or his or her advisers;
  • The time and effort expended by the taxpayer in carrying on the activity;
  • An expectation that assets used in the activity may appreciate in value;
  • The taxpayer’s success in carrying on other similar activities;
  • The taxpayer’s history of income or losses with respect to the activity;
  • The amount of occasional profits that are earned;
  • The financial status of the taxpayer; and
  • The elements of personal pleasure or recreation involved with the activity.

Planning tip: Although an activity must be engaged in for profit to avoid the hobby loss rules, a predictable or highly probable expectation of profit is not required. For example, a taxpayer may well have a profit motive for investing in a very risky venture (e.g., wildcat oil and gas drilling or providing capital to startup businesses). The circumstances should indicate that the taxpayer entered into or continued the activity with the honest objective of making a profit, but even risky investments can be considered made for a profit motive.

The following example illustrates planning devices that can be used to reduce the chances that a hobby loss issue will arise.

Example. Planning to avoid the hobby loss issue: G owns a highly successful auto repair business that he operates in partnership with brothers N and J, who are unrelated to G. As a separate activity, G maintains several racing cars he enters in competitions on evenings and weekends. G’s auto racing activities have been increasingly successful, and last year he won prize money of about $10,000. He reports this activity on a Schedule C, Profit or Loss From Business, within his Form 1040, U.S. Individual Income Tax Return. Despite the increasing gross receipts of this proprietorship, the operating expenses, travel costs, and depreciation on several racing vehicles have resulted in large losses for the venture.

G expects his auto racing winnings to continue to increase, but he also recognizes that the deductions will continue to exceed the income for the next several years. He visits his tax practitioner and inquires whether he can minimize the risk of a hobby loss attack in case of an IRS audit. Will an S election assist in preventing a hobby loss determination?

If G’s car racing proprietorship was determined by the IRS not to have a sufficient profit motive, he would only be allowed to claim deductions to offset the gross income and would not be allowed to claim a loss within his personal tax return. In making this determination, the subjective factors listed above must be considered.

The first of these factors is clearly enhanced when a taxpayer conducts the activity in a business-like fashion, maintaining a separate checking account, accurate business records, and the other formalities normally associated with a for-profit trade or business. If G incorporates, he would be required to use a separate corporate checking account for the car racing activity and file a separate S corporation tax return. He would probably also become involved in the payroll tax system by issuing a Form W-2, Wage and Tax Statement, for the labor he provides to the corporate activity.

At a minimum, the existence of the S corporation would enhance the business-like appearance of the activity. In fact, by using the additional procedures associated with the formation of a corporation and expanding his recordkeeping requirements, G would likely improve his ability to meet the various subjective tests that go into the determination of a hobby loss issue. However, G must clearly understand that the mere formation of an S corporation provides no direct statutory assurance of overcoming the hobby loss question; the courts have held that losses incurred by an S corporation are deductible by the shareholders only if the corporation is in fact engaged in a for-profit trade or business (DuPont, 234 F. Supp. 681 (D. Del. 1964); Demler, T.C. Memo. 1966-117).

The tax practitioner would also advise G of the other advantages and disadvantages associated with S corporation status. For example, any salary G draws from the corporation for his labor would present additional Federal Insurance Contributions Act and Federal Unemployment Tax Act costs that would not exist in a proprietorship.

This case study has been adapted from the Checkpoint Tax Planning and Advisory Guide‘s S Corporations topic. Published by Thomson Reuters, Carrollton, Texas, 2021 (800-431-9025;

John Baer, CPA, is a specialist editor with Thomson Reuters Checkpoint. For more information about this column, contact

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